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MODEL THE MARKET

WITH A FOURIER
SERIES INDICATOR
Capture cyclic activity 8

ELECTION EFFECTS ON
THE STOCK MARKET
And how you can play it 18

THE V-TRADE
Part 11: Expert
manual trading 26

INTERVIEW
Talking volatility with
John Bollinger 36

TRADING MISTAKES
TO AVOID
Be mindful of these 44

REVIEW
n The 3S Code

JUNE 2019
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 CONTENTS JUNE 2019, VOLUME 37 NUMBER 7

7 Conditional OTO Breakouts

by Ken Calhoun
The Traders’ MagazineTM Using one-triggers-the-other (OTO)
conditional orders is ideal for
breakout trading. Here’s why.
EDITORIAL
editor@traders.com

Editor in Chief Jack K. Hutson

FEATURE ARTICLE
Editor Jayanthi Gopalakrishnan
8 Fourier Series Model TIPS
Production Manager Karen E. Wasserman Of The Market
Art Director Christine Morrison by John F. Ehlers
Graphic Designer Wayne Shaw Traders are aware that cyclical
Webmaster Han J. Kim activity can be observed in market
Contributing Editors John Ehlers, data. Here’s a way to use a Fourier
Anthony W. Warren, Ph.D. series indicator to model the market
Contributing Writers Thomas Bulkowski, Martin Pring, and describe cyclic market activity
Barbara Star, Markos Katsanos
so you can develop realistic trading
strategy rules for swing trades.
OFFICE OF THE PUBLISHER 42 Explore Your Options
Publisher Jack K. Hutson 16 Futures For You by Jay Kaeppel
Industrial Engineer Jason K. Hutson by Carley Garner Got a question about options?
Project Engineer Sean M. Moore
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license by CCC, a sep­ar­ate sys­tem of pay­ment has been
arranged. The fee code for users of the Transactional system to trade, we’ll look at using Indicator and scanner for locating
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36 Talking Volatility 48 Traders’ Tips
56 Trade News & Products
in book format (without ads) or digitally from www.traders. With John Bollinger 57 Advertisers’ Index
com. USA funds only. Washington state res­i­dents add by Jayanthi Gopalakrishnan 57 Editorial Resource Index
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59 Traders’ Resource
Technical Analysis of Stocks & Commodities™,
The Traders’ Magazine™, is prepared from information
found in most financial charting
believed to be reliable but not guaranteed by us with­out software and charting websites.
further verification, and does not purport to be complete. His book Bollinger On Bollinger
Opinions expressed are subject to revision without noti-
fication. We are not offer­ing to buy or sell securities or
Bands has been translated into 12
commodities discussed. Technical Anal­ysis Inc., one or languages. He’s been the recipient
more of its officers, and authors may have a position in of several industry achievement n Cover: Roy Wiemann
the securities discussed herein.
The names of products and services presented in this
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benefit of the trademark owner, with no intention of infring- into market volatility based on his This article is the basis for
TIPS Traders’ Tips this month.
ing on trademark rights.
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4 • June 2019 • Technical Analysis of Stocks & Commodities

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 ERRATA: FORMULA SYNTAX
The editors of S&C invite readers to submit their opinions and information on subjects
In “A Reliable Set Of Technical Indica-
relating to technical analysis and this magazine. This column is our means of communi-
tors” in the April 2019 issue, the formulas
cation with our readers. Is there something you would like to know more (or less) about?
given on page 23 for use on the TC2000
Tell us about it. Without a source of new ideas and subjects coming from our readers, this
platform contained a syntax error in
magazine would not exist.
that commas were used in some places
Email your correspondence to Editor@Traders.com or address your correspondence
where periods were needed. The correct
to: Editor, Stocks & Commodities, 4757 California Ave. SW, Seattle, WA 98116-4499. All
syntax for use on the TC2000 platform
letters become the property of Technical Analysis, Inc. Letter-writers must include their full
is as follows:
name and address for verification. Letters may be edited for length or clarity. The opinions
expressed in this column do not necessarily represent those of the magazine.—Editor
For scanning LONG candidates:
(STOC12.1 > 78) OR ((STOC12.1 < 78) AND
(STOC12.1 > AVG(STOC12.1, 3)))
FORMULAS FOR STOCK SCANNING Author Christian Pratsch replies:
Editor, First, please note that in the formula’s For scanning SHORT candidates:
With great interest I syntax, which was written for the (STOC12.1 < 78) OR ((STOC12.1 > 78)
have read the article TC2000 platform, periods should be AND (STOC12.1 < AVG(STOC12.1, 3)))
“A Reliable Set Of used in the notation “stoc12.1” and
Technical Indicators” commas should be used between the We regret any inconvenience. The for-
in the April 2019 issue stochastics values and the SMA (AVG) mulas with corrected syntax is also given
of Stocks & Com- values, for example, STOC12.1,3). at our website, Traders.com, under the
modities. In the article, author Christian Second, regarding your question S&C Article Code menu.—Editor
Pratsch writes that he uses the following about the stochastics levels to use in the
formula to scan for long candidates: two formulas, several different formu- FUTURES LIQUIDITY
las are possible for finding stocks that Editor,
For scanning LONG candidates: are decreasing in value and that may/ I subscribe to your al-
(STOC12,1 > 78) OR ((STOC12,1 < 78) should be sold or shorted. One possible ways interesting maga-
AND (STOC12,1 > AVG(STOC12,1,3))) formula is the one I gave in my article; zine.
it seems to give the earliest signal of a Regarding your Fu-
and the following formula to scan for price decrease. tures Liquidity page,
short candidates: Another possible formula that shows usually found toward
a stronger price decrease and thus the back of your magazine each month,
For scanning SHORT candidates: indicates a stronger need to sell or sell I would like to know the liquidity of the
(STOC12,1 < 78) OR ((STOC12,1 > 78) short is: DAX and BUND futures (Eurex). Could
AND (STOC12,1 < AVG(STOC12,1,3))) you kindly add them to your valuable
STOC12.1<78 AND STOC12.1 < ranking?
In both formulas he uses the stochastics AVG(STOC12.1,3) Giuseppe Capretti
level of 78. But I was wondering, since
the long and short positions are opposite, The formula that you give in your let- Thank you for writing and for your sug-
wouldn’t we use the 78 level (indicating ter seems to indicate that a major price gestion. We will look into whether this
overbought) for short candidates but use decrease has occurred in the past in the could be added.—Editor
the 22 level (indicating oversold) for long stock and may be near a point of a pos-
candidates (or vice versa)? For example, sible time to repurchase. If you do use
the formula for short candidates would that formula, just be sure to wait until
then be as follows: stoc12.1 lies above its SMA3.

(STOC12,1 < 22) OR ((STOC12,1 > 22)

YOUR ONLINE
AND (STOC12,1 < AVG(STOC12,1,3)))
RESOURCE FOR
I understand the formulas to mean that TECHNICAL
the author is using the stochastics indica-
tor with parameters of 12 and 1, and he is ANALYSIS
adding to that a simple moving average
(SMA) with the parameter of 3.
Wei

6 • June 2019 • Technical Analysis of Stocks & Commodities

 TRADING ON MOMENTUM
NeuroShell
One Triggers The Other Trader
Conditional OTO
2019 WINNER
AI TRADING

Breakouts SO�TWARE

Using one-triggers-the-other (OTO)
conditional orders is ideal for breakout
trading. Here’s why.
SAVE TIME
The great thing about this approach
is that you do not have to constantly Build trading
monitor your trading account to see if systems in minutes
an order is filled for which you would
without coding

W
by Ken Calhoun need to set your stop-loss manually. It
is also a great technique to enforce trad-
henever you are looking to ing discipline, because by entering your
enter a new position, it is initial stop order as part of the OTO pair,
important to combine techni- you automatically close the position at
cal analysis of the chart pat- your predetermined stop-loss value. I
terns with trade management strategies use trailing stops, because this locks in
designed to minimize risk and improve profits for breakout trades in which the
profitability. Using conditional orders trend goes up then back down again. The
provides a valuable trade management trailing stop protects your profits early NeuroShell.com
tool that can help you enter and exit your on the way back down. 301 662 7950
positions more effectively.
Conditional orders combine two single Step-by-step action plan
orders in a way that makes the second Here’s how you can start using this
trade contingent upon conditions that strategy. Continued on page 14
you set ahead of time, such as a spe-
cific stop-loss value. For most of my
trading career I ignored these because
they seemed too complicated. But after
having tested them out with hundreds of
trades recently, and seeing the success
rate, I will use these exclusively from now
on. This month’s column will explain
how it works.

Using OTO orders to

automatically trail stops
Using one-triggers-the-other (OTO)
trades for breakouts provides an ideal
solution for both entries and exits. You
simply set up two trades simultaneously.
The first is your entry; for example,
“Buy 500 shares buy-stop $1.30.” The
second is your exit; for example, “Trail
stop 500 shares $ 0.30” (see Figure 1).
These two orders are paired together
for easy reference. This completely
automates both your entry and exit, be-
cause the second trade (your stop) does
eSIGNAL

not activate until after the first trade, in

which you purchase shares, has filled. FIGURE 1: USING OTO ORDERS TO MANAGE ENTRY AND EXIT. On this chart of ATAI (ATA Inc. ADR), you
You can exit with either a trailing stop see that by using a “one-triggers-the-other” (OTO) order pair, you automatically set your trailing stop ahead of
or hard stop. time, before your initial order is filled.

June 2019 • Technical Analysis of Stocks & Commodities • 7

8 • June 2019 • Technical Analysis of Stocks & Commodities
 CYCLES
Harmonic Synchronicity
Fourier Series Model
Of The Market
Traders are aware that cyclical activity can be ob-
served in market data. Here’s a way to use a Fourier
series indicator to model the market and describe
cyclic market activity so you can develop realistic
trading strategy rules for swing trades.
E
ven the most casual observer will note that
cycles are present in market data. Since this
is so obvious, it is natural to try to embed the
analysis of these cycles into trading strate-
gies to make them better and more profitable. In this
article, I’ll describe such analysis.
In his seminal 1970 book The Profit Magic of
Stock Transaction Timing, J.M. Hurst described five
principles when dealing with periodic-cyclic motion.
These were:
1. The summation principle
2. The commonality principle
3. The variation principle
4. The nominality principle
5. The proportionality principle
The principles, explained
Addressing these principles in reverse order, the pro-
portionality principle simply states that the longer
the duration of the cycle component, the larger its
magnitude. The modern description of this principle
is that the market data is fractal. This principle
causes problems with cycle measurements because
most measurements do not account for this effect,
which I call spectral dilation. This principle is more
ROY WIEMANN
statistical in nature and is not absolutely true all the
time. The Fourier series model I propose dynami-
by John F. Ehlers
cally accounts for the relative amplitudes of the cyclic
components.
The nominality principle reflects that some cyclic
components tend to be consistently present. For ex-
ample, I have found that most stocks and stock indexes
tend to have a monthly, or 20-bar, cycle of daily data.
I don’t like to assign causality, but it makes sense that
all management, from bottom to top, usually have to
make their numbers on a monthly basis. It is not hard
to image that this management imperative is reflected
in stock prices.
The variation principle means cycles in the data
are not absolutely stable. The duration of their cycle
periods, amplitudes, and phases shift as a function
of time. After all, if cycles were consistently present,
every trader in the world would jump on them. That
they are so recognizable, in effect, makes them self-
destructive.
The commonality principle simply means the cyclic
components in different stock ticker symbols tend to
have similar durations and the highs and lows tend to
be in time synchronization. This principle forms that
basis of robustness test of a given trading strategy. If
a strategy works well on one stock symbol, it should
also work well on another similar stock if that strategy
is to be robust.
The summation principle is a restatement of the
theory of Fourier series. That is, any arbitrary wave-
shape can be created by a sum of harmonics of sine
wave primitives. Hurst goes on in detail about how
to synthesize patterns such as double tops, double
bottoms, head & shoulders, and flags and pennants
from their sine wave primitives.
As a quick review of Fourier series synthesis of
waveshapes, I will show a few simple examples.
June 2019 • Technical Analysis of Stocks & Commodities • 9

WWW.GRAPHMATICA.COM
FIGURE 1: SYNTHESIZED DOUBLE TOPS AND DOUBLE BOTTOM PATTERNS.
Here, a Fourier series synthesis of waveshapes plots alternating double top and
double bottom pattern shapes.
FIGURE 2: SYNTHESIZED HEAD & SHOULDERS PATTERNS. Head & shoulders
patterns can be synthesized from sine wave harmonics. Both direct and inverse head
& shoulders patterns can be seen.
FIGURE 3: SYNTHESIZED ELLIOTT WAVE PATTERN WITH BASIC WAVE COUNT.
Even an Elliott wave pattern can be synthesized from sine wave primitives.
For example, consider the expression:
y = Sin(x) + 0.33*Sin(3*x)
where the angle arguments are in radians. This expression plots
out to be alternating double top and double bottom pattern
shapes, as shown in Figure 1. So, using the variation principle,
these patterns can come and go as a function of time.
Head & shoulders patterns can be synthesized from sine
wave harmonics with a minor variation of the previous expres-
sion as:
y = sin(x) + 0.1*Sin(3*x) + 0.2*Sin(5*x)
This expression plots the alternating direct and inverse head
& shoulders patterns, as shown in Figure 2.
10 • June 2019 • Technical Analysis of Stocks & Commodities
Even an Elliott wave pattern can be synthesized from sine
wave primitives though the use of the equation:
y = Sin(x) - 0.5*Sin(2*x) + 0.33*Sin(3*x)
The resulting wave, with the basic wave count, is shown in
Figure 3.
The synthesized patterns were plotted using a free graph-
ics package that can be downloaded from http://graphmatica.
com.
Synthesis of patterns using sine wave primitives is relatively
easy. All you have to do is follow the summation principle using
harmonics of various amplitudes and phase angles. Analysis
of a pattern by breaking it down to its component sine wave
primitives is another thing altogether. In theory, there are a triple
infinity of parameters to consider for each harmonic component.
That is, you must determine the frequency, amplitude, and phase
of each one. Further, according to the variation principle, the
harmonic components are not time invariant. The problem of
analyzing patterns in terms of their sine wave primitives seems
to be virtually impossible.
However, truth and science again triumph over ignorance
and superstition. The technical tool that isolates each of the
primitive components is a band-pass filter. A band-pass filter
passes only the cycle period of interest and rejects all other
frequency components that may be present in the data spec-
trum. The band-pass filter and its characteristics are described
in chapter 5 of my book Cycle Analytics For Traders. The
band-pass filter isolates each of the harmonic components with
their relative phases, and enables further measurement of their
relative amplitudes.
There are tradeoffs in the use of the band-pass filter, as there
are with most technical tools. In this case, the tradeoff is between
the bandwidth of the filter and speed of its transient response.
That is, if the filter bandwidth is designed to be too narrow,
then the filter “rings out” like a bell and is slow to respond to
changes in the input data. For this application, a reasonable
compromise is have the filter bandwidth be 10% of its center
period. So if the band-pass filter is tuned to a 20-bar cycle
period, it will also pass spectral components having periods
between 19 and 21 bars.
Since the harmonic components of the data spectrum can be
isolated using band-pass filters, the seemingly impossible task of
analyzing market data using a truncated Fourier series analysis
A band-pass filter passes only
the cycle period of interest
and rejects all other frequency
components that may be
present in the data spectrum.
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can be accomplished using a precise algorithmic sequence. The
steps of this sequence are:
1. Select a fundamental cycle period.
2. Precisely measure the fundamental as well as second
and third harmonics in narrow-band band-pass filters.
The relative phases of these sine wave primitives are
determined by the measurement.
3. Determine the relative amplitude of the three cyclic
components.
4. Following the principle of summation, add the three
FOURIER SERIES ANALYSIS IN EASYLANGUAGE
{ S2*BP2[2];
Fourier Series Analysis
(C) 2005-2018 John F. Ehlers
} Q2 = (Fundamental / 6.28)*(BP2 - BP2[1]);
Inputs:
Fundamental(20);
Vars:
Bandwidth(.1),
G1(0), S1(0), L1(0), BP1(0), Q1(0), P1(0),
G2(0), S2(0), L2(0), BP2(0), Q2(0), P2(0),
G3(0), S3(0), L3(0), BP3(0), Q3(0), P3(0),
count(0),
Wave(0),
ROC(0);
//compute filter coefficients once P2 = 0;
If CurrentBar = 1 Then Begin
L1 = Cosine(360 / Fundamental);
G1 = Cosine(Bandwidth*360 / Fundamental);
S1 = 1 / G1 - SquareRoot(1 / (G1*G1) - 1);
L2 = Cosine(360 / (Fundamental / 2));
G2 = Cosine(Bandwidth*360 / (Fundamental / 2));
S2 = 1 / G2 - SquareRoot(1 / (G2*G2) - 1);
L3 = Cosine(360 / (Fundamental / 3));
G3 = Cosine(Bandwidth*360 / (Fundamental / 3));
S3 = 1 / G3 - SquareRoot(1 / (G3*G3) - 1);
End;
//Fundamental Band-Pass Plot2(0);
BP1 = .5*(1 - S1)*(Close - Close[2]) + L1*(1 + S1)*BP1[1] -
S1*BP1[2];
If CurrentBar <= 3 Then BP1 = 0;
//Fundamental Quadrature
Q1 = (Fundamental / 6.28)*(BP1 - BP1[1]);
If CurrentBar <= 4 Then Q1 = 0;
//Second Harmonic Band-Pass
BP2 = .5*(1 - S2)*(Close - Close[2]) + L2*(1 + S2)*BP2[1] -
12 • June 2019 • Technical Analysis of Stocks & Commodities
harmonic components together using their relative am-
plitudes.
5. Repeat for each bar across the chart.
These steps will produce a smooth time-variable pattern that
describes market activity in direct synchronization with the
price action of the market. The waveform is smooth because
only the three harmonic sine wave components are used, and
the extraneous noisy components are ignored. You can then
use this smoothed waveform as the basis for realistic trading
strategy rules.
The details of the algorithmic sequence are described in
If CurrentBar <= 3 Then BP2 = 0;
//Second Harmonic Quadrature
If CurrentBar <= 4 Then Q2 = 0;
//Third Harmonic Band-Pass
BP3 = .5*(1 - S3)*(Close - Close[2]) + L3*(1 + S3)*BP3[1] -
S3*BP3[2];
If CurrentBar <= 3 Then BP3 = 0;
//Third Harmonic Quadrature
Q3 = (Fundamental / 6.28)*(BP3 - BP3[1]);
If CurrentBar <= 4 Then Q3 = 0;
//Sum power of each harmonic at each bar over the Fundamental
period
P1 = 0;
P3 = 0;
For count = 0 to Fundamental - 1 Begin
P1 = P1 + BP1[count]*BP1[count] + Q1[count]*Q1[count];
P2 = P2 + BP2[count]*BP2[count] + Q2[count]*Q2[count];
P3 = P3 + BP3[count]*BP3[count] + Q3[count]*Q3[count];
End;
//Add the three harmonics together using their relative amplitudes
If P1 <> 0 Then Wave = BP1 + SquareRoot(P2 / P1)*BP2 +
SquareRoot(P3 / P1)*BP3;
Plot1(Wave);
{
//Optional cyclic trading signal
//Rate of change crosses zero at cyclic turning points
ROC = (Fundamental / 12.57)*(Wave - Wave[2]);
Plot3(ROC);
}
terms of the EasyLanguage code given in the sidebar “Fourier
Series Analysis in EasyLanguage.” The fundamental period is
an input and the default value of 20 bars is used. The variables
are declared, and then all the filter coefficients are computed
on the first bar of the chart for execution efficiency because
they do not change across the chart. In the next block of code,
the band-pass filters for the fundamental as well as second FIGURE 4: FOURIER SERIES INDICATOR AND SYNTHESIZED ELLIOTT WAVE.
The Fourier series indicator (red line) faithfully replicates the synthesized Elliott
and third harmonics are computed, as well as the quadrature wave (blue line).
components.
The quadrature components (Q1, Q2, and Q3) are generated
by taking the one-bar difference of their respective band-pass
filter response. This is analogous to taking their derivative
in calculus. Recalling that the derivative of a sine wave is a
cosine wave as
FIGURE 5: FOURIER SERIES INDICATOR AND DOUBLE TOPS & BOTTOMS. The
d(sin(ωt))/dt = (1/ω)*cos(ωt)
Fourier series indicator (red line) faithfully replicates the double tops and double
bottoms (blue line).
then taking the derivative produces a 90-degree shift (that is,
quadrature of a cycle) of the same waveform with an amplitude liott wave pattern. The test is whether the Fourier series indicator
adjustment. Since the band-pass filters have a relatively narrow can accurately recreate that waveform at its output. Figure 4
bandwidth, we can treat this adjustment as the fundamental shows that the Elliott wave as the blue line is faithfully repro-
period divided by two pi. duced by the red line output of the indicator. It’s not perfect,
The quadrature components are required to measure the but it’s pretty good. One potential cause of the error is the half
amplitudes of the fundamental and two harmonic waves. Using bar of lag in the computation of the quadrature components, but
the trigonometric relationship this lag is not correctable. Figure 5 shows that the double tops
and double bottoms as the blue line is also faithfully reproduced
1 = sin2(x) + cos2(x) by the red line output of the indicator even though there is no
second harmonic in the original signal.
you can find the power in the wave as the sum of the squares The fun part is seeing how the Fourier series indicator works
of the in-phase and quadrature components. The power in on real data. Figure 6 shows a little more than one year’s worth
the second and third harmonic waves are correctly computed of daily data on the symbol SPY. The Fourier series indicator
because they are summed over two and three cycle periods, is shown in the first subgraph below the price chart. From left
respectively, when the power is averaged over the fundamental to right, the market was in a trend mode in the fall of 2017 into
cycle period. January of 2018. The indicator shows this by having very little
Finally, the waveform is synthesized by adding the second swing amplitude. After an erratic period, a strong cycle mode
and third harmonics at their relative amplitudes to the filtered was present from April 2018 through October 2018. Note that
fundamental signal. the peaks and valleys of the indicator align with the extreme
The additional optional code,
which is currently commented
out, creates a trading signal as
the rate of change (ROC) of the
wave. This signal crosses zero
each time the wave attains a peak
or valley. So if the amplitude of
the swing is adequate, the ROC
crossing zero is an excellent time
to enter or exit a swing trade.

Real-world trading
It is imperative that a technical
analysis indicator perform as
expected on deterministic wave-
TRADESTATION

forms before it can be applied to

noisy, real-world data. Toward
that end, I created a data signal FIGURE 6: FOURIER SERIES INDICATOR AND SPY. The Fourier series indicator accurately shows trends as well as cyclic
consisting of the synthesized El- turning points.

June 2019 • Technical Analysis of Stocks & Commodities • 13


These steps will produce a
smooth time-variable pattern
that describes market activity
in direct synchronization with
the price action of the market.
Stocks & Commodities Contributing Editor John Ehlers is
a pioneer in the use of cycles and DSP technical analysis. He
is president of MESA Software and cofounder of StockSpotter.
com and BeYourOwnHedgeFund.com, which is a new site that
provides portfolios based on his algorithmic strategies.
The code given in this article is available in the Article Code section
of our website, Traders.com.

See our Traders’ Tips section beginning on page 48 for commentary

and implementation of John Ehlers’ technique in various technical
analysis programs. Accompanying program code can be found in the
swings in prices, showing there is predictive value in the indica- Traders’ Tips area at Traders.com.
tor based on continuation of the cycle. The peaks and valleys
of the indicator also tend to line up with the extreme swings Further reading
during the volatile period in the fall of 2018. Ehlers, John F. [2013]. Cycle Analytics For Traders: Advanced
Technical Trading Concepts, John Wiley & Sons.
In summation • http://www.graphmatica.com.
The Fourier series indicator gives a faithful and tradable picture
of market activity based on the five principles established by †See Traders’ Glossary for definition
J.M. Hurst. It is made possible through the use of band-pass
filters that isolate the fundamental and its second and third
harmonics. The filter preserves their relative amplitudes and
phases so that a truncated Fourier series can be established
using the summation principle.
TRADING ON MOMENTUM

CALHOUN stop once an order is filled. There’s no

Continued from page 7
Step 1: For the stock in which you
are considering buying shares in,
set up a buy-stop OTO order for
the number of shares you wish to
purchase (in Figure 1 this would
be $1.30).
Step 2: Simultaneously, you enter
the conditional OTO trade using
your stop-loss value ($0.30 in Figure
1). In your brokerage account you
will see both orders paired together,
as in 1A and 1B.
Step 3: No further work is needed,
since you have entered orders that
determine your entry and exit ahead
of time.
insights: whY this
teChniQue woRKs
What I like about this approach is that
I don’t have to ever worry again about
putting in a trailing stop or initial hard
14 • June 2019 • Technical Analysis of Stocks & Commodities
more constantly keeping an eye on my
portfolio. The other biggest benefit, and
why this technique works for me best, is
because now I can set up more sophis-
ticated sequences of orders for position
sizing. For example, you can set up two
or three orders, and their associated trail-
ing stops well ahead of time. This “set
it and forget it” OTO technique greatly
simplifies and automates the entire trad-
ing process from start to finish. I really
wish I had found this 20 years ago; I will
never trade without OTO orders again.
Be sure to call your broker for initial
assistance in setting up these order pairs
to make sure you’ve got it right.
tRade management tiPs
In testing hundreds of OTO orders
recently, I find they greatly improve
my profitability, because the automatic
trailing stops lock in profits early after
trend reversals, before I would see them
on my own. The two primary parameters
to test are the initial share size for the
entry order, and the size of the trailing
The trailing stop protects
your profits early on the
way back down.
stop for the exit order. Keep careful notes
of lessons learned to see which combina-
tion of order size and stop value work
best for you, in the instruments that you
are trading. My most successful setup
is one in which I do three OTO pairs at
progressively higher prices (every $2 for
swing trades and every $0.30–$0.40 for
intraday trades). That way, if one shakes
out during an uptrend, one or more of
the remaining pairs often works out and
makes it worthwhile.
Ken Calhoun is a producer of trading
courses, a live trading room, and video-
based training systems for active traders.
He is the founder of TradeMastery.com,
an educational resource site for active
traders, and is a UCLA alumnus.
Don’t let
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 FUTURES FOR YOU
INSIDE THE FUTURES WORLD
Want to find out how the futures markets really work? Carley Garner is the senior
strategist for DeCarley Trading, a division of Zaner, where she also works as a
broker. She has written four books on futures and options trading, with the latest
being a new edition of her book A Trader’s First Book On Commodities (third
edition, October 2017) as well as Higher Probability Commodity Trading (July
2016). Garner also authors widely distributed e-newsletters; for a free subscrip-
tion, visit www.DeCarleyTrading.com. To submit a question, email her at info@
carleygarnertrading.com or via www.DeCarleyTrading.com. Selected questions Carley Garner
will appear in a future issue of S&C.

NEW MICRO FUTURES CONTRACTS
Is the CME’s new micro S&P 500 futures
contract a good way to dip a toe into the
futures markets with lower risk? What
do we need to know?
In my view, the CME’s new micro
stock index futures contracts will act
as a bridge between the worlds of stock
trading and futures trading. Its small
contract size translates into less risk
and lower margins for futures traders in
products such as the S&P 500, NASDAQ
100, and Russell 2000. The micro-sized
contracts dramatically lower the barri-
ers to entry and, ultimately, encourage
risk-averse speculators into an arena they
previously assumed to be out of reach.
Let’s take a closer look.
There are a plethora of advantages
to trading futures contracts relative to
stock market ETFs, such as favorable tax
treatment, easier tax reporting, around-
the-clock market access, ease of short-
ing the market, and trading on margin
without the burden of paying interest
charges to a brokerage house. But there
is one large bright pink elephant in the
room: leverage and the associated risk
(such as large swings in position profit
and loss).
Although leverage could also be
argued to be an advantage to trading fu-
tures, we are only human and, therefore,
tend to indulge when we shouldn’t. Just
as most Las Vegas buffet patrons make
a point to eat themselves to a state of
bloat and discomfort because there is
no incremental cost to doing so, futures
traders often lean toward glutinous use
of free leverage. Eventually, this misuse
of leverage and lack of risk manage-
ment can lead to the ruin of a trading
16 • June 2019 • Technical Analysis of Stocks & Commodities
account. Accordingly, futures trading
has traditionally been considered off-
limits for the average risk-averse inves-
tor. However, as the futures exchanges
add smaller contracts, that conventional
wisdom will be challenged.
The Chicago Mercantile Exchange
(CME) has recognized the need for
a stepping stone for those interested
in the convenience of futures trading
but not interested in the big risks that
come with it. Accordingly, on May
6, 2019, the CME launches a suite of
micro-sized futures contracts written
Thanks to CME’s new
micro stock index
futures, those looking
for efficient, around-
the-clock trading with
mitigated risk exposure
will find what they
are looking for in the
futures markets.
with the major US stock indexes as the
underlying assets. Specifically, there
will be a micro emini futures contract
for the S&P 500, NASDAQ 100, DJIA,
and Russell 2000. Each of these bite-
sized contracts will be 1/10th the size
of the traditional emini versions. This
means that instead of a trader making or
losing $50 per point in the S&P or $20
per point in the NASDAQ, the trader
will make or lose a more manageable
$5 or $2, respectively.
If you are wondering what the contract
size is and what the margin is, you are
asking the right questions. As with any
index future, the contract size is depen-
dent on the index price. The value can
be determined by multiplying the point
value by the current price. Thus, if the
S&P 500 is trading at 2,850, the micro
emini futures contract would represent
$14,250 worth of an S&P 500 allocated
portfolio of stocks. The margin required
to trade these products is estimated to
be about $660 for the emicro S&P 500
and $836 for the emicro NASDAQ 100
futures contract.
The low margin rates make stock
index futures trading more accessible
to retail traders and the smaller contract
size enables traders with low-risk toler-
ance to more comfortably participate.
Nevertheless, even trading micro emini
futures requires participants to educate
themselves on the risk involved. On a
percentage basis, the new micro emini
futures offer just as much leverage as
their full-sized counterparts. Thus, trad-
ers must understand and, in my opinion,
work to mitigate that leverage through
overfunding.
To illustrate, if the S&P 500 is trad-
ing at 2,900, a trader buying or selling
that futures contract is making or losing
money based on $14,500 worth of S&P
allocated stock. If that trader purchases
a single micro emini S&P 500 futures
contract in an account with a $1,000
balance, he is utilizing a significant
amount of leverage (trading an asset
 UOY ROF SERUTUF

worth 14.5 times the value of the trading

account). As we all know, leverage is a
double-edged sword that can be fatal
if we’re caught on the wrong side. The
same trader can reduce leverage by al-
locating more funds to the account per
contract traded. For instance, purchasing
a single contract in an account funded
with $7,250 leaves the trader exposed to
risk on an asset worth twice the account
balance. This leverage ratio of 2 to 1 is
much easier to manage than 14.5 to 1,
but that is still leverage that some are
uncomfortable with. However, funding
the account with $14,500 eliminates the
leverage involved. Thus, the trader can
access the benefits of the futures markets
(again, offering 23-hour trading, lower
taxes, and simpler reporting, the ability
to go short without borrowing shares or
paying interest, and so on) without be-
ing exposed to the scary side of futures
trading—leverage.
The greatest aspect of being in control
of leverage usage is the ability to scale
in and out of trades utilizing various
levels of aggression and leverage as your
opinions change. This enables specula-
tors to employ a practice like dollar-cost
averaging in a moderately-sized futures
account. In other words, rather than be-
ing “all in” or “all out” of a trade, they
can incrementally buy contracts to build
their desired position and then later peel
off risk, and hopefully profits, as they
exit the market. The ability to buy and
sell incrementally almost always results
in a more favorable average entry and
exit price because it is nearly impossible
to pick highs and lows of a market while
navigating the market.
In conclusion, trading stock index fu-
tures is no longer reserved for those with
either large trading accounts, high toler-
ance to risk, or both. The futures markets
are what you make it. Those seeking high
amounts of leverage will find what they
are looking for. Now thanks to CME’s
new micro stock index futures, those
looking for efficient, around-the-clock
trading with mitigated risk exposure and
the ability to dial leverage down to zero
will also find what they are looking for
in the futures markets.

June 2019 • Technical Analysis of Stocks & Commodities • 17

 Which Country Will Be The Next Brazil?
The Effect Of Elections
On Stock Market Returns
Do elections influence the stock market? Is there a pattern
that investors can take advantage of? This author’s statistical
research suggests that there is one pattern that produced
more than 60% average returns during the election periods
in countries around the world.
T
by Markos Katsanos
here is no doubt that political events can influ-
ence stock market returns. Upcoming elections
are especially important since they can affect the
economic and monetary policy of the country.
While there is a plethora of studies and
multiyear statistical research concerning the
performance of the US stock market during the
Presidential election cycle, such studies are few
or nonexistent for other countries around the world. But it was
mainly the stellar performance of the Brazilian ETF (EWZ),
which hit a four-year high after the election of Jair Bolsonaro
in Brazil, that motivated me to investigate similar setups in
other countries.
18 • June 2019 • Technical Analysis of Stocks & Commodities
Preliminary research revealed that the stock market in
countries transitioning from a socialist or left-wing party to a
pro-business party (usually right-wing party) performed best.
So I decided to confine my analysis to this setup only. In the
following research I analyzed the effect of general elections
in countries around the world during pre-election and post-
election periods and calculated the associated stock market
returns. Finally, I will suggest similar setups in progress.
Historical election period
performance
For the benefit of US-based investors, I included only elections
in countries with a stock index ETF that can be traded in the
US markets. The results exceeded my expectations, produc-
ing an average 18% return during the three-month average
HENNADII_HARYLKO/SHUTTERSTOCK
pre-election period, more than 40% average return during the
nine-month post-election period, and more than 70% average
total return (see Figure 1). Performances of individual ETFs
in Figure 2, however, varied from the corresponding index, as
some (mainly the iShares MSCI Brazil Index ETF (EWZ) and
the iShares MSCI Chile Index ETF (ECH) were enhanced by
 STATISTICAL ANALYSIS

Pre-elec- Post-elec- Pre- Post-

Election Incumbent Party Winning Party tion Rally tion Rally election election Total Rally
Country Index
Date Duration Duration Rally Rally (%)
Orientation Party/President Orientation Party/President (Months) (Months) (%) (%)
Workers’ Party (PT) Social Liberal Party
Brazil BVSP 10/07/18 Left Far-right 0.8 4.0 12.5 17.6 32.0
/ Temer (PSL) / Bolsonaro
USA SP-500 11/08/16 Center Democrats / Obama Right Republicans / Trump 4.5 14.8 6.9 32.7 42.0
India BSESN 05/09/14 Center Congress / Singh Right BJP-NDA / Modi 3.2 8.8 13.8 29.1 47.0
New Democracy (ND)
Greece ATG 06/17/12 Socialist PASOK / Papendreou Right 0.4 11.1 17.6 105.7 142.0
/ Samaras
Japan N225 12/16/12 Center DPJ / Noda Right LDP / Abe 1.1 5.2 12.4 60.5 80.0
Conservative coalition
UK FTSE 05/06/10 Center Labour / Brown Right with Liberal Demo- 10.0 9.6 27.5 15.6 47.0
crats / Cameron
Canada TSX60 01/23/06 Center Liberal / Martin Right Conservative / Harper 3.2 2.9 13.3 7.9 22.0

France CAC40 04/23/17 Socialist SP / Hollande Pro-business LREM / Macron 7.3 9.1 17.2 9.1 28.0

Left-wing Cambiemos coalition

Argentina MERV 11/22/15 FPV / Kirchner Center-right 1.8 26.5 50.6 147.8 273.0
Peronist / Macri
Socialist Party Of Chile Vamos coalition
Chile IPSA 11/19/17 Socialist Conservative 4.8 2.4 14.0 9.1 24.0
Chile / Bachelet / Piñera
Average 3.7 9.4 18.6 43.5 73.8
Trimmed Mean 3.3 8.2 16.0 35.0 55.4
Median 3.2 9.0 13.9 23.4 44.4
Maximum 10.0 26.5 50.6 147.8 273.2
Minimum 0.4 2.4 6.9 7.9 22.2
FIGURE 1: HISTORICAL PRE-ELECTION AND POST-ELECTION STOCK MARKET PERFORMANCE IN LOCAL CURRENCY. Here you see: the time period in which
upcoming elections started having an effect on the stock market; the time period in which election results had an effect on the stock market after the elections; the per-
formance of the appropriate country stock market index from a previous bottom up to one day before the elections; the performance of the stock market index from the
day after the elections until a market top; and the total performance of the index from the start of the pre-election rally until the first top after the elections. To calculate
the trimmed mean (depicted below the average at the bottom of the table), I removed the best and worst values and calculated the average on the rest of the data. This
reduced the effects of the outliers on the calculation of the average.

the appreciation of the Brazilian real and Chilean Pre-elec- Post-elec-

Election tion Rally tion Rally
Pre-
election
Post-
election Total Rally
peso respectively while the performances of the Country ETF
Date Duration Duration Rally Rally (%)
Global X FTSE Argentina 20 ETF (ARGT) and (Months) (Months) (%) (%)
iShares MSCI Japan Index ETF (EWJ) were nega- Brazil EWZ 10/07/18 0.8 3.9 27.7 16.8 49.0
tively affected by the weakness of the Japanese yen USA SP-500 11/08/16 4.5 14.8 6.9 32.7 42.0
and the Argentinian peso (see Figure 3). India INDA 05/09/14 3.2 8.6 18.6 23.0 46.0
The table in Figure 3 is of particular interest Greece GREK 06/17/12 0.4 11.1 33.8 88.9 153.0
to forex traders since it depicts the performance Japan EWJ 12/16/12 1.1 5.2 7.2 29.2 38.0
of the local currencies vs. the US dollar during UK EWU 05/06/10 10.0 11.9 14.3 32.6 52.0
the election periods. Most of the currencies were
Canada EWC 01/23/06 3.1 3.5 18.6 9.9 30.0
positively affected by the election except for the
France EWQ 04/23/17 4.8 9.3 14.1 27.7 46.0
Japanese yen and Argentinian peso. The reason for
Argentina ARGT 11/22/15 1.8 26.7 26.3 93.4 144.0
the JPY weakness was the BOJ dovish monetary
Chile ECH 11/19/17 4.8 2.5 20.4 12.2 35.0
policy following heightened pressure from newly
elected Japanese Prime Minister Shinzo Abe for it Average 3.4 9.8 18.8 36.6 63.5

to pursue “unlimited” monetary easing in order to Trimmed Mean 3.0 8.5 18.0 33.0 56.5

finally overcome deflation. Median 3.1 8.9 18.6 28.4 45.8

Argentina’s peso was in a free fall during the
post-election period, tumbling 26% the day after the
election as newly inaugurated President Mauricio
Macri fulfilled his campaign promise of letting the
currency float freely.
Macri’s reason for the devaluation was a key part
of the economic overhaul to lure investment, lower
inflation (which was 25% at the time) and jump-start
FIGURE 2: HISTORICAL PRE- AND POST-ELECTION PERFORMANCE OF THE CORRESPOND-
ING COUNTRY ETF TRADING IN THE US MARKETS. There is a small difference in performance
between the ETF and the corresponding index in Figure 1 because of local currency fluctuations,
different stock constituents, and investor sentiment affecting the ETF price vs. the NAV (net as-
set value). For an explanation of the performance columns please see the legend in Figure 1.
The trimmed mean was calculated by removing the best and worst values. The best performer
was the Greek ETF, which returned 89% after the elections and more than 150% on aggregate.
The performances of the Japanese and Argentinian ETF were adversely affected by the local
currency depreciation, while the performances of the Brazilian, Canadian, French, and Chilean
were positively affected by the currency appreciation (see also Figure 3).

June 2019 • Technical Analysis of Stocks & Commodities • 19

 Pre-elec- Post-elec- Pre- Post-
Election tion Rally tion Rally election election Total Rally
Country Forex
Date Duration Duration Rally Rally (%) an economy suffering from lackluster growth. The
(Months) (Months) (%) (%) depreciation brought the official rate closer in line
Brazil BRL/USD 10/07/18 2.0 3.9 9.5 5.4 15.0 with where the peso had been trading in the black
USA DXY 11/08/16 4.6 1.9 4.6 5.5 10.0 market and eased the shortage in US dollars.
India INR/USD 05/09/14 3.4 8.8 5.2 -2.3 3.0 The first in the list and most recent example (but
Greece EUR/USD 06/17/12 0.5 7.6 1.6 7.9 10.0
not the best performer as of writing this article in
Japan JPY/USD 12/16/12 1.1 5.2 -3.9 -19.1 -22.0
March 2019) of an election rally is that of Brazil (see
Figure 4). I am not sure that the post-election rally
UK GBP/USD 05/06/10 10.0 9.6 -8.9 10.0 0.0
is over, because the post-election rally is rather low
Canada CAD/USD 01/23/06 2.3 3.5 2.5 5.8 9.0
compared with other countries. The consolidation
France EUR/USD 04/23/17 4.1 1.0 3.3 4.8 8.0
of the recent gains is normal and further gains are
Argentina ARS/USD 11/22/15 2.0 26.5 -2.3 -50.7 -52.0
possible, depending, of course, on the ability of the
Chile CLP/USD 11/19/17 4.8 3.3 6.3 5.8 12.0
new Brazilian President Jair Bolsonaro to imple-
Average 3.5 7.1 1.8 -2.7 -0.6 ment his market-friendly election promises, which
Trimmed Mean 3.0 5.5 2.0 2.0 3.8 include privatization of state-owned companies,
Median 2.9 4.6 2.9 5.4 8.4 fiscal reforms, and last but not least, an overhaul of
FIGURE 3: LOCAL CURRENCY (FOREX) PRE- AND POST-ELECTION PERFORMANCE VS. the country’s social security system and other mea-
THE US DOLLAR. The Brazilian real and Chilean peso performed best while the Japanese yen sures to bolster South America’s largest economy.
The recent correction at the end of March 2019 is
and the Argentinian peso (in red) performed the worst. The reason for the JPY weakness was
the BOJ dovish monetary policy, while Argentina’s peso was in a free fall as newly inaugurated
President Mauricio Macri let the currency float freely. because of problems in passing the pension reform
bill in the Brazilian Congress.
Brazil BOVESPA Index (BVSP)
The best-performing country ETF (see
Figure 2) concerned the Greek election rally
Pre-election rally Post-election rally in 2012–2013. On June 17, 2012, the second
Election day round of parliamentary elections was held
in Greece because the first inconclusive
vote in May failed to produce an outright
Brazilian Real
(BRL/USD)
winner. The conservative right-wing New
Democracy (ND) party narrowly won the
elections and four days later, the party
leader, Antonis Samaras, was sworn in as
METASTOCK / REUTERS DATA

the new prime minister after he reached an

agreement with another two smaller parties
to form a coalition government.
The volatility rose dramatically before
the elections, as the results were too close
FIGURE 4: DAILY CHART OF THE BRAZIL IBOVESPA INDEX (BVSP) IN SEMI-LOG SCALE DURING THE
ELECTION PERIOD FROM APRIL 2018–MARCH 29, 2019. to call. Greek stocks were, at the time, near
multiyear lows because of the Greek debt
Wilder’s ADX(14) crisis and fears of a GREXIT (see Figure
5). The Athens General index surged 18%
in the week preceding the election day and
Athens General Index (ATG) more than doubled (see Figure 5) after
Election day the conservative New Democracy party
Pre-election
rally narrowly beat the radical-left coalition
Syriza. The GREK ETF performed even
better as the discount to NAV (net asset
200-Day MA value) narrowed and the euro appreciated
Post-election rally nearly 8% during the post-election period
as fears of a GREXIT abated.
The elections on June 17, 2012 opened,
Volume in Greece, a period of profound change in
the political scene. The meteoric rise of the
Coalition of the Radical Left (SYRIZA)
FIGURE 5: DAILY CHART OF ATHENS GENERAL SHARE INDEX (ATG) IN SEMI-LOG SCALE FROM MAY
2012 UNTIL MAY 2014. Notice the short pre-election rally (in gray), longer post-election rally (in light blue),
party voters from 4% in 2007 to 27% in
the surge in volatility during the election period depicted by Wilder’s ADX in the top window, and the spike 2012 signaled the collapse of the country’s
in volume in the bottom window. two traditionally powerful parties—the
20 • June 2019 • Technical Analysis of Stocks & Commodities
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THESE RESULTS ARE BASED ON SIMULATED OR HYPOTHETICAL PERFORMANCE RESULTS THAT HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE THE RESULTS SHOWN IN AN ACTUAL PERFORMANCE RECORD, THESE RESULTS DO NOT REPRESENT ACTUAL
TRADING. ALSO, BECAUSE THESE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THESE RESULTS MAY HAVE UNDER-OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED OR HYPO-
THETICAL TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES
SIMILAR
SIMI TO THESE BEING SHOWN. THE TESTIMONIAL MAY NOT BE REPRESENTATIVE OF THE EXPERIENCE OF OTHER CLIENTS AND THE TESTIMONIAL IS NO GUARANTEE OF FUTURE PERFORMANCE OR SUCCESS. TECHNICAL ANALYSIS OF STOCKS &
COMMODITIES LOGO AND AWARD ARE TRADEMARKS OF TECHNICAL ANALYSIS, INC.

When volatility is present in
the markets, it is prudent to
sell all or half your position
before the elections and buy
again if the market-friendly
candidate wins.
moderate Socialist PASOK and center-right New Democracy
(ND), which had dominated the political life for the past 38
years. SYRIZA ended up as Greece’s second-strongest party
with 26.9% of the popular vote in the June 2012 elections,
gaining 17 points since 2007 and thus becoming the dominant
party of the Greek center-left, while the socialist PASOK
tumbled 27 points in the corresponding period.
The PASOK’s demise started after it imposed two austerity
measures following Greece’s 2009 debt crisis, while SYRIZA
gained most of the discontented voters from PASOK.
Finally, the Indian elections in May 2014, although they
didn’t result in the best stock market performance, deserve
an honorable mention, since it was the first time since 1984
that a party had a majority on its own in the Lok Sabha (lower
house of parliament). This was the world’s largest election and
it lasted over five weeks. A record of more than 550 million
ballots were cast in all 29 Indian states from the Jammu and
Kashmir in the north to the southern tropical state of Kerala.
Narendra Modi and his Bharatiya Janata Party (BJP) swept to
power on promises of an economic revival and left the ruling
Congress party nursing its worst defeat since independence
more than 60 years ago. Business leaders and millions of
young Indians have thrown their weight behind Modi, trust-
ing in his promises to sweep away bureaucratic blockages to
big infrastructure projects, promote investment, and create
jobs. Corruption accusations against the National Congress
Bombay SE SENSEX Index (BSESN)
Indian Ruppee (INR/USD)
Post-election rally
Pre-election
rally
Election day
FIGURE 6: DAILY CHART OF THE BOMBAY SE SENSEX INDEX (BSESN) IN
SEMI-LOG SCALE FROM JULY 2013 UNTIL APRIL 2015. The Indian rupee (INR/
USD) is superimposed in black. Notice the explosive rally during the announcement
of the election results in mid-May 2015.
22 • June 2019 • Technical Analysis of Stocks & Commodities
incumbent coalition government didn’t help either.
Responding to the Modi win, Indian markets got off to a
roaring start, with the BSE Sensex index jumping 1,500 points
or more than 6% during the next three days, and the Indian
rupee breaking to an 11-month high.
The elections were conducted in nine phases from April
7, 2014 to May 12, 2014 and the final results were declared
officially on May 16, 2014. For the tables in Figures 1–3, I
calculated the pre- and post-election market performance using
the first breakout date, which was six days before the official
results were announced. The explosive breakout suggests that
the official results were mostly discounted by the markets.
Pending elections
Greece
The upcoming elections in Greece present
a compelling opportunity. In a similar setup
during the 2012 elections, the Athens General index more
than doubled in the next 11 months after the elections (see
the table in Figure 1 and the chart in Figure 5).
The exact election date hasn’t been set yet but according
to the Greek constitution, elections should be held every four
years. The next elections therefore can’t be held later than
October 20, 2019. There is a small possibility that Prime
Minister Alexis Tsipras could call a snap election in May
2019 in order to coincide with the elections for the European
parliament, but this is not likely.
The conservative New Democracy (ND) party is leading in
the polls by more than 10% at the time of writing this article
(end of March 2019) over the left SYRIZA party. It has been
four years since Syriza, the “Coalition of the Radical Left,”
came to power in Greece. The party had cruised to victory in
elections on the back of massive protests against the austerity
measures that were being implemented in the country, which
was ravaged by the economic crisis and huge debt.
But more than three years after Syriza’s Alexis Tsipras
became prime minister, there has been a deepening of the
policies Syriza had promised to end. The main opposition New
Democracy (ND) president Kyriakos Mitsotakis promised to
lower taxes and create a more business-friendly environment
as the only way to exit the current impasse. This will boost
Greek companies’ earnings and the stock market. In a similar
setup, when US President Donald Trump promised sweeping
tax cuts, the S&P 500 was up 26% before the tax bill was
passed by Congress and another 12% after that.
According to my statistical research (see Figure 1), the
average pre-election period is about three months, but it looks
like it has already started early for the Greek stock market
(see Figure 7). According to Victor Sperandeo’s 1-2-3 pattern
theory, there has been a change of trend for Greek stocks,
which, by the way, until recently were trading at multiyear
lows, as all three of Sperandeo’s conditions have been fulfilled:
On January 23, 2019 the Athens General index broke above
the downtrend line; on December 28, 2018 it made a higher
low; and finally, on February 18, 2019 it made a higher high.
On February 26 the General index broke through the 200-
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 shortages and frustration as people seeking
Greece General Share
to exchange their banknotes had to stand in
Athens General Share (ATG)
lengthy queues.
200-Day MA The Hindu Modi government was also
Trendline criticized for using sectarian politics and
was accused of condoning the 2002 Gujarat
1

riots that resulted in the death of almost 1,000

people, many of them Muslims. Modi, despite
Higher High 3
the discontent, is currently leading in the polls,
but keep in mind that opinion polls are not
reliable in India simply because Indians tend
to not tell the truth to the pollsters. Manipula-
tion of the polls has also been reported. The
2
Higher Low

stock market is also discounting a Modi win:

FIGURE 7: RECENT DAILY CHART OF ATHENS GENERAL SHARE INDEX (ATG) FROM MARCH 2018 The BSE Sensex Index broke out above the
UNTIL THE END OF MARCH 2019. The pre-election rally has already started. The Sperandeo 1-2-3
prerequisites for a change of trend are marked on the chart. upsloping channel on March 12, surging more
than 9% from the February lows (see Figure
day moving average on strong volume, and is now more than 8). There is no point in speculating the possibilities of a Modi
20% higher from the December lows. This is the first time win any further since by the time this article comes to press,
since April of 2013 that the General index was up for six it will be too late to take advantage of the pre-election rally.
consecutive weeks. You could, however, profit from a post-election rally.
To take advantage of the election rally, US-based investors
could buy the Global X MSCI Greece ETF (GREK), as it is How to play it
the only ETF trading in the US to directly target Greece. A They say that history repeats itself. By observing the relevant
similar ETF, trading on the Paris Stock Exchange, is the Lyxor charts during past elections I noticed the following points
MSCI Greece UCITS ETF (Paris: GRE; Yahoo GRE.PA) and that you should keep in mind if you want to trade during an
is more appropriate for European investors. According to the election period:
Global X fund website, GREK pays a 2.63% dividend and • The pre-election rally performance depends on opinion
the total expense ratio is 0.59% and as of March 29, 2019 it polls. The higher the leading candidate margin, the
was trading 0.25% below NAV. GRE, according to the Lyxor stronger the performance will be. After the elections
website, pays a 2.36% dividend, with a total expense ratio you should expect a short consolidation period because
of 0.45% and as of March 28, 2019 it was trading at a 0.5% of the “sell on the news” effect.
premium to the NAV price.
• If the opinion polls are too close to be able to call the
India winner, strong positive price changes should be expected
In April–May 2019, an estimated 900 million Indians will be following the election as uncertainty about the winner
heading to the polls to elect their next parliament. Voting is and his policies is resolved.
spread across India’s 29 states and is due to begin on April • Pre-market rallies tend to intensify as the election out-
11, with the final ballot cast more than five weeks later on
May 19 and votes counted by May 23. Narendra Modi and his
Bombay SE SENSEX Index (BSESN)
Hindu pro-business Bharatiya Janata Party (BJP) are seeking
reelection after a landslide victory in 2014.
The main national opposition party is the National Con-
gress, led by Rahul Gandhi, the son of former Prime Minister
Rajiv Gandhi. His grandmother Indira was India’s first female
leader, and his grandfather, Jawarhlal Nehru, was the country’s
founding prime minister.
Opinion polls consistently demonstrate that the BJP’s popu-
larity across India is on the decline. Modi’s popularity was INR/USD
negatively impacted mainly by two controversial economic
decisions: the demonetization of high-value currency (500
and 1,000 rupee notes) in November 2016 and the rollout of
a goods & service tax in July 2017.
The demonetization was intended to remove black money FIGURE 8: RECENT DAILY CHART OF BOMBAY SE SENSEX INDEX (BSESN)
from the economy and reduce the use of counterfeit notes FROM AUGUST 2018 UNTIL THE END OF MARCH 2019. The Indian rupee (INR/
but it was poorly planned and resulted in prolonged cash USD) is superimposed in black.

24 • June 2019 • Technical Analysis of Stocks & Commodities

 come becomes more certain and markets discount the
election result.
• Volatility. Upcoming general elections create uncertainty
and volatility in the markets especially if the opinion
polls are too close to call the winner. The greatest degree
of volatility should be expected in the two-week period
immediately preceding the election date, as this is when
media coverage and campaigning are at their peak. (See
Athens general index in Figure 5).
• Higher volatility is also to be expected if the result fails
to produce a clear winner and a second-round runoff
is required.
• When volatility is present in the markets, it is prudent to
sell all or half your position before the elections and buy
again if the market-friendly candidate wins. Daytraders
can take advantage of the volatility and daytrade the
appropriate index futures or the country ETF.
• After the initial honeymoon period, the duration of the
post-election rally will depend on whether the president-
elect can fulfil his/her election promises.
• A promise of tax cuts by one of the candidates will pro-
duce the strongest election rally, provided the candidate
who made the promise is leading in the polls.
Conclusion & comparison with
similar studies
The historical evidence is clear that during the election period
there are significant market trends that are closely correlated
with the outcome of an election and the resulting changes to
economic policy. These tend to have short- to medium-term
impact on capital markets and can be a buying opportunity
for investors. This article is only an empirical study focusing
mainly on maximizing profits during the election periods, as
my sample size was too small to draw a statistically significant
conclusion. However, other researchers on the subject (see
further reading at end) generally confirm some of my findings.
More specifically, Pantzalis et al. examined the stock market
performance and volatility in 33 countries up to four weeks
before and after the election date and classified their results
based mainly on various characteristics, such as election tim-
ing (early elections), country freedom rankings, pre-election
economic performance, and election outcome (incumbent win
or loss), and they generally found that the market response is
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something new and better for visual traders
greater when the election outcome constitutes a change in the
status quo (that is, the incumbent loses) and also in less free
countries with poor economic performance. Specifically, he
observed strong positive abnormal returns leading up to the
elections in cases when the incumbent government lost or
in early elections and stronger post-election market reaction
for elections with the highest degrees of uncertainty that was
magnified when the incumbent party lost.
Cahan et al. found that stock returns in New Zealand were
higher under the center-right national party. This was con-
firmed by Anderson et al., who argued that this was true for
Australia as well. Siokis et al. studied the effect of political
developments on the stock market in Greece, and found that
the mean and variance of the stock market index is affected
by political developments in Greece.
My article may be criticized as being politically biased. The
truth is that I am not the one with the bias but investors (and the
financial markets) surely are. My research was based only on
statistical analysis of historical prices, and data doesn’t lie.
Markos Katsanos is a technical analyst, author of Intermarket
Trading Strategies, and a Stocks & Commodities Contribut-
ing Writer. He is the author of six chapters in the Chartered
Market Technician Level III manual. He can be reached at
markos.katsanos@gmail.com or through his website at http://
mkatsanos.com.
Further reading
Anderson, H.D., C.B. Malone, and B.R. Marshall [2008]. “In-
vestment Returns Under Right-And Left-Wing Governments
In Australasia Pacific-Basin,” Finance Journal, 16 (3).
Cahan, J., C.B. Malone, J.G. Powell, and U.W. Choti [2005].
“Stock Market Political Cycles In A Small, Two-Party
Democracy,” Applied Economics Letters, 12 (12).
Fotios Siokis, and Kapopoulos Panayotis [2007]. “Parties,
Elections And Stock Market Volatility: Evidence From A
Small Open Economy,” Economics And Politics, Wiley
Blackwell, Vol. 19 (1), March.
Katsanos, Markos [2010]. Intermarket Trading Strategies,
John Wiley & Sons.
Pantzalis, C., D.A Stangeland, and H.J. Turtle [2000]. “Political
Elections And The Resolution Of Uncertainty: The Interna-
tional Evidence,” Journal Of Banking & Finance, 24 (10).
‡MetaStock; Reuters data
‡See Editorial Resource Index
June 2019 • Technical Analysis of Stocks & Commodities • 25
 Using An Expert System

The V-Trade
Part 11: Expert Manual Trading

In this series, we’ve discussed trading concepts and tech-
niques, technical analysis, and getting set up to trade. In this
part, which continues with using an expert system to trade,
we’ll look at using the expert system for manual and semi-
automatic trading.
V-trade chart templates
First, I’ll describe the two basic templates I currently use
with V-Trade (which stands for Vervoort trading, the method
I use to make manual and automatic buy & sell decisions).
These templates will help you to better understand my trad-

A
by Sylvain Vervoort
fter presenting an overview of the V-Trade expert sys-
tem in part 10, this time I’ll take a detailed look at the
ing examples.
Chart template for modified renko bars
Figure 1 shows the V-Trade chart template for use with modified
renko bars. The renko bar chart template consists of the fol-
KOYA 979/SHUTTERSTOCK /LETTER COLLAGE: NIKKI MORR

different manual trading options and possibilities that lowing elements (the numbering corresponds to the chart):
I believe should be present in any expert system.
1. Modified renko bricks. A brick closing at the upper
The benefit of an expert system is that it can encode your
side is green, and the opening price is the lower side
trading rules and help you implement your signals. Not only
of the brick. A brick closing at the bottom side is red,
does this help take the emotion out of your trading, but it also
and the opening price is at the top of the brick. Either
can give you some freedom to be away from your trading screen
an upper or lower wick shows the lowest or highest
even while trades are in play. You can use an expert system for
price of the session.
manual trading, semi-automatic trading, or automatic trading.
Last time, I listed the specifications for my expert system. 2. Short-term linear-weighted moving average. This
Here, I’ll show how I use it for manual trading. is used to identify short-term price trends and active
26 • June 2019 • Technical Analysis of Stocks & Commodities
 TRADING TECHNIQUES

support & resistance areas.

10 (5)-c-C-(C)
3. A 100-bar simple moving average,
mainly used to spot medium-term 11
dynamic support & resistance. 5-(3)
4. A 200-bar simple moving aver-
(4)
age, mainly used for looking for
longer-term dynamic support & 3
resistance.
2 3
5. Upper and lower side of the 5 4
volatility band. This band uses 1 4 6
the Sve_VolatilityBand indicator. (1)
Within this volatility band, price 2 5
1
makes bottoms and tops. b (2)
6. Tick-based high-low zigzag indica-
tor for counting V-waves using the

METAQUOTES SOFTWARE
SVE_HLZigZagTicks indicator. 7
8 9
7. Stochastic RSI indicator (SVESR-
SI). Used to show convergences
and positive, negative, and hidden
divergences between the indicator FIGURE 1: V-TRADE CHART TEMPLATE FOR MODIFIED RENKO BARS. Here, a V-Trade template is applied
to an 800-tick DAX index modified renko bar chart. The blue numbers on the chart correspond to the list of
and price. template elements.
8. Renko count open–buy digital
indicator. Used for automated 18
trading based on the reversal of 13
a number of consecutive up or 11
down bricks.
9. Renko count open–sell digital
indicator. Used for automated 12 14 15
trading based on the reversal of
a number of consecutive up or 13
down bricks.
10. Expert systems include but are 11
not limited to the expert Band 13
Break System (BBS), the renko
count (RC) expert system, and the
16
crossover (CRO) expert including
semi-automatic trading with the
line break method, the multi-lots 17
strategy, a trailing-stop method, a
daily profit–loss strategy, and of FIGURE 2: V-TRADE CHART TEMPLATE FOR CANDLESTICKS. The V-Trade fixed time-related template is
course, manual trading. used on a 15-minute Nasdaq candlestick chart. The numbers on the chart correspond to the list of template
elements.

Chart template for standard candle bars

Figure 2 shows the fixed time-related template using a standard
candlestick chart. The time-related chart template consists of
the following elements:
11. Upper and lower side of the volatility band. For this
standard candlestick chart, this band uses Bollinger
Bands with a linear-weighted middle band integrated
into the Sve_VolatilityBand indicator. Within this band,
price reaches bottoms and tops, showing a band squeeze
during consolidation phases.
12. The short-term (20) typical price linear-weighted mov-
ing average, identifying the short-term price trend.
13. Pivot points calculated with the Sve_Pivots indicator
based on the previous day’s price range. The levels
shown are called PP—the median price pivot point
(dashed blue); S1, S2, and S3 support levels; R1, R2,
and R3 resistance levels; and the highest (light green)
and lowest (magenta) price of the previous day. Pivots
are considered a target, support, or resistance level.

June 2019 • Technical Analysis of Stocks & Commodities • 27


If you apply all of the techniques
I described in my previous
articles in this series on the
V-Trade, you should have a good
chance of being able to estimate
the direction and size of the
next move most of the time.
14. A 100-bar simple moving average (100-SMA),
mainly used to spot medium-term dynamic support
& resistance.
15. A 200-bar simple moving average (200-SMA), mainly
used to look for longer-term dynamic support &
resistance.
16. A stochastic RSI indicator (SVESRSI). Used to show
convergences as well as positive, negative, and hidden
divergences between the indicator and price.
17. Any of the digital technical indicators integrated into the
expert system for the generation of buy & sell signals.
18. Expert systems include but are not limited to the expert
Band Break System (BBS), the renko count (RC) expert
system, and the crossover (CRO) expert system, includ-
ing semi-automatic trading with the line break method,
the multi-lots strategy, a trailing-stop method, a daily
profit/loss strategy, and of course, manual trading.
If you apply all of the techniques I described in my previ-
ous articles in this series on the V-Trade, you should have a
good chance of being able to estimate the direction and size
of the next move most of the time. However, be aware that
any move making some 10 to 15 pips or more has pullbacks.
Because of this, keep in mind that profit could turn into a
loss, at least temporarily.
It may be a good idea to take profit when price arrives at
the first level of support or resistance because you can never
be 100% sure that the move will continue after the pullback.
Next, wait for an appropriate time to reenter the trade at a
better price level when reaching some short-term resistance.
That way, you avoid frustration, and you may even make
more profit.
Before diving in, let me take a minute to remind you of
three guiding principles you should live by when trading and
that you should never forget:
• NEVER trade with money you cannot afford to lose!
This statement is unquestionably true if you trade with
high leverage. Trade the lot size you can afford and that
is in line with your available trading capital and the
amount of money you are prepared to lose.
28 • June 2019 • Technical Analysis of Stocks & Commodities
• NEVER overtrade!
• ALWAYS keep a close eye on the required margin!
Basic trading tools
The first and most important thing to say about an expert system
is that it is an absolute must that your trading platform allows
you to stop and start the expert system at any moment for any
input modification. It is also imperative that any possible break
in communications with your broker does not influence the
expert operation after a reconnect. Furthermore, experiencing
a power failure or intentionally switching off your PC must
not influence the expert system when your PC and trading
platform are restarted.
First, make sure that your live trading platform is not blocked.
In my V-Trade system, I have an alert message that pops up
when live trading is blocked by the platform itself. Second,
[Expert system is Active] must be true in SveExpert inputs
(see “The V-Trade, part 10b: The Expert System” in the May
2019 issue for all inputs) and third, you can only open a new
trade if [Allow Opening New Trade] is true. This is a good
start when building a trading system. You are making sure
that you are informed if trading is blocked by your trading
platform. You can block your expert system completely, and
you will be able to block the opening of a new trade while
still being able to close trades via the expert system.
Because an expert strategy is linked to a single chart and you
are using the same expert system for different charts within
the same trading platform, each expert must have some unique
identification. In the V-Trade system, this is called the [Expert
Magic Number]. You have to verify that every expert in all
charts has a different number. Otherwise, you may have buy
or sell triggers from different charts influencing each other.
You don’t want that!
When opening a new trade on your broker’s trading platform,
you must make sure that the order is executed with a stop-loss
setting. The V-Trade system includes different ways to handle
stop-losses and take-profit settings. The settings registered
with the execution of your order at your brokerage site are
important. The stop order should be a worst-case stop just to
make sure that if your brokerage connection is lost, there is
still a stop-loss and take-profit order in place.
In the V-Trade expert strategy, we will use the following
inputs:
[Initial stop ticks on brokers level] This is for setting the initial
stop-loss with the opening of a long or short trade. Generally,
we use a high, safe value acting as a worst-case emergency
stop. This stop is visible to the market and executes even if
your trading platform is not connected with your broker.
[Initial take-profit ticks on brokers level] This is for setting
the initial target profit when opening a long or short trade.
You should use a realistic profit for this trade to attract buyers.
This target is visible to the market and executes even if your
PC is not in operation.
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 We define all stops and targets on a multiple of the basic
tick size of the underlying instrument.
On the other hand, we want to maintain a tighter stop and
profit-target price related to the risk, lot size, leverage, and
strategy, controlled by the expert system. For this, we have
two more entries in the V-Trade expert system:
[This expert stop-loss setting in ticks] This is the stop-loss
controlled directly by the expert, not visible to the market.
Smaller than [Initial stop ticks on brokers level].
[This expert take-profit setting in ticks] This is the target
profit controlled directly by the expert, not visible to the
market. This is smaller than [Initial take profit ticks on
brokers level].
Another method implemented is a trailing stop-loss. We
are using four parameters:
[Trailing Stop is Active] When true, allows closing trades
using a trailing-stop method. The trailing stop compares the
current price tick with the opening price of the trade. The
trailing stop must be set before opening the trade. Using this
trailing-stop method together with the [Auto-Trade Multi-
Lots Strategy] is not possible. I will talk more about this in
an upcoming article in this series.
[Initial Trailing Stop Ticks] This is the initial stop setting
in ticks starting the trailing-stop method.
[Start Trailing Stop after this Profit] Launches the effec-
tive trailing-stop method only after reaching this minimum
profit in ticks. Until then, the [Initial Trailing Stop Ticks]
remains in place.
[Trailing Stop Ticks] The effective trailing stop in ticks.
Finally, we may use one more method related to profit &
loss. Here, we can set the maximum loss or profit made within
a single day:
[Maximum $ Loss to stop trading this day] Stop trading
today at this maximum allowed dollar loss. You can use a
negative or positive number. All open trades will be closed
automatically.
[Maximum $ Profit to stop trading this day] Stop trad-
ing today when this total dollar profit is reached. You may
use a positive or negative value. All open trades are closed
automatically.
The main purpose of the entries [Maximum $ Loss to stop
trading this day] and [Maximum $ Profit to stop trading this
day] is to protect your account by defining the maximum loss
allowed or the expected profit in a single trading day.
Once reaching this maximum loss or maximum profit tar-
30 • June 2019 • Technical Analysis of Stocks & Commodities
Either the index is going to
reverse, continuing the previous
uptrend, or it’s just a short-
term consolidation with price
continuing to fall after the
correction. What can you do?
get, all open trades close. No new trades open unless a new
day is started or you enter a new maximum allowed loss or
maximum profit-target value. You can set one or both entries
and you may use a positive or negative value.
Important note: Use this expert setting in one chart only
and leave it at zero in all other charts!
You could even use these settings as an extra feature for
semi-automatic trading. Assume you want to accept a maxi-
mum loss of $100 while your target is a day profit of $50. Any
time of the day you reach one of these values, all open trades
close, and no more trades can open unless you redefine new
limits for the day.
You may even consider applying this strategy multiple
times during the day, each time adapting your loss and target
settings to the current loss or profit of the day.
Suppose your current profit is $10. Now you are prepared
to risk $20 for a profit of $20. In that case, set the loss target
to $-10 and the profit target to $20. Price moving up another
10 dollars gives you the $20 profit while price moving down
10 dollars will close all trades with a $10 loss.
Alternatively, suppose your current loss is $-30. You want
to risk another $20 for a profit of $30 to recover the current
loss. In that case, set the loss to $-50 and the profit to $1 (not
zero, because this is the “not active” value) to recover the
current $30 loss.
Manual trades
Trading platforms usually have built-in options
to manually open and close trades. A trading
platform buy or sell signal can open or close any
trade unrelated to the expert system, meaning it
is always possible to make manual trades with
or without an active expert.
The V-Trade expert strategy allows you to open a new
manual trade that will be created on the next incoming price
tick if [Manually Open a Long Position] or [Manually Open
a Short Position] is set to true. After the trade is executed,
you will get a warning message to set the manual command
back to false.
Semi-automatic trades
The V-Trade expert system allows you to trade based on
trendlines, support, and resistance lines. You have to draw a
trendline and give it a specific name for a buy or sell action
or to close an open position.
Opening semi-automatic trades
First, you have to decide if a buy or sell action is taken when
the current high or low price is at or moves above or below
the trendline, or whether action is only taken if the current
closing price is at or moves above or below the trendline. Set
the following expert input as true or false:
[Trendline Break on Closing Price] If set to false, a line
break is validated when the trendline is broken with a tick
high or tick low of the current price bar. If set to true, a line
break is validated only after the trendline is broken with the
closing price, that is, the opening price of the next price bar.
If price is already above or below the required buy or sell
action when drawing the trendline, the trade will be executed
immediately with the next price tick.
Trendline break opening trades
The V-Trade system uses the following abbreviations to create
open buy signals:
ols: Open long stop. Open a long position if the price breaks
or is above the open long stop line.
oll: Open long limit. Open a long position if the price breaks
or is below the open long limit line.
olc: Open long close. Open a long position after closing
an existing short position (css) when price breaks or
is above the open long close line (ols).
The V-Trade system uses the following abbreviations to create
open sell signals:
oss: Open short stop. Open a short position if the price
breaks or is below the open short stop line.
osl: Open short limit. Opens a short position if the price
breaks or is above the open short limit line.
osc: Open short close. Open a short position after closing
an existing long position (cls) when price breaks or is
below the open short close line (oss).
The use of the olc line is mainly to close an open short posi-
tion with a small loss while quickly opening a long position
in the direction of the new uptrend. In the same way, you can
use the osc line to close an open long position with a small
loss while quickly opening a short position in the direction
of the new downtrend.
Trendline break closing trades
The following abbreviations are used to create closing buy
or closing sell signals:
cls: Close long stop. Close a long position if price breaks
or is moving below the close long stop line.
cll: Close long limit. Close a long position if price breaks
or is moving above the close long limit line.
css: Close short stop. Close a short position if price breaks
or is moving above the close short stop line.
csl: Close short limit. Close short position if price breaks
or is moving below the close short stop line.
lsb: Long stop block. Close long at a stop-loss below the
lsb line and block the opening any new auto-trade.
llb: Long limit block. Close long for a profit above the llb
line and block the opening of any new auto-trade.
ssb: Short stop block. Close short at a stop-loss above the
ssb line and block the opening of a new auto-trade.
slb: Short limit block. Close short for a profit below the slb
line and block the opening of a new auto-trade. Block-
ing commands are useful to take a profit or loss when
you aren’t sure what is coming next if in auto-trade
mode.
More closing commands
[Close on LneBrk;0=NU;-1=ALL;or Ticket] “0” means this
entry is not used and it’s the default value. “-1” means ALL
open positions on all charts and all magic numbers will close
after a closing trendline break in this chart. This is a kind of
emergency fast close for all open positions.
Important note: Use the -1 setting in one chart and one
expert only!
“Ticket” means a single order that closes one specific open
order ticket number only.
[Close ALL Magic trades on Next Tick] If true, closes all
long and short trades with this specific magic number with
the next price tick.
[Close ALL Magic trades on Line Break] If true, closes all
long and short trades opened with this specific magic number
when breaking any closing trendline type.
[OCA One order Cancels All other Orders] If true and more
opening line break trades are set, any one order executed will
cancel all others.
Trading with trendline breaks
To finish up this part 11 of this series, which is
the second part on the topic of expert systems,
let me show you a few examples trading semi-
automatically with trendline breaks.
Opening a long position at a stop level
In Figure 3, which is a 30-minute chart of the Nasdaq index,
price reverses from a top 3-wave. You expect a downward
correction wave-4. After this correction, an impulse wave-5
must bring price above the top of wave-3. When would be the
best time to start a long trade?
Once you see a lower top after the wave-3 top, you can draw
the downward red trendline. Breaking this trendline with a
closing price most probably confirms the start of impulse wave-
5. If we give this line the name “ols” for open-long-stop, the
June 2019 • Technical Analysis of Stocks & Commodities • 31
 expert system will automatically open a
long position when a high or closing price Close Buy 5
moves above the trendline, depending
161.8

c11
on the setting of [Trendline Break on
Closing Price]. When this happens, you
see some more interesting things that are
confirming an upward price reversal: The 3 100.0

index is reversing from the low side of

the Bollinger Band; you see support from ols
the 200-bar moving average; the S2 pivot
50.0

support; a bullish harami candle pattern;

the flattening of the 20-period linear
weighted moving average (blue); and the 4 cls 0.0

stochastic RSI is moving up from the bot-

tom after a convergent move, indicating Open Buy
that the last down move was a correction
move, now reversing. After the order is
confirmed, the ols trendline is automati-
cally removed from the chart. FIGURE 3: TRENDLINE BREAK TRADE. Here’s an example of opening and closing a long position on trendline
Once you have an open position, you breaks.
can set a stop-loss with a cls close-long-
stop-line (red horizontal line at the bottom) for closing your Fibonacci retrace over the bottom of wave 4 (0%) and the top
long position when the index falls through this cls line. We of wave 5 (100%) gives a 50% level at 6708. This may be just a
draw this technical stop line just below the bottom of wave 4. pullback, continuing the downtrend after a reaction, or it may
This line will limit the loss if the index would unexpectedly be the start of a reversal to continue a longer-term uptrend.
continue the move down. The index moves down to the 50% retrace over wave-5,
To set a price profit target, you can make a Fibonacci pro- with an a-wave moving very close to the 50% retrace. Note
jection over the top of wave 3 and the bottom of wave 4. The at almost the same level the black horizontal line, a support
first price target will be the 100% Fibonacci line at the level of from the previous wave-3 top, and support from the low side
the top of wave 3. The second target is the 161.8% Fibonacci of the Bollinger Band. We also see active support from the
target around 6800. You can now draw a horizontal—the cll 200-bar simple moving average (red).
green line just below the 161.8% Fibonacci target—to close Either the index is now going to reverse, continuing the previ-
the trade with a profit. ous uptrend, or it is just a short-term consolidation with price
From here, the system will do the job for you, closing your continuing to fall after the correction. What can you do?
open long position with a profit close to 200 index points in There will be an up reversal or a downward continuation.
just two days! And the good thing is that you did not have to To capture an up reversal, we draw an extended downward
be in front of your trading screen
all the time.
5 Close Long Position cll 100.0

Open Short Position

Opening a short or long
b B
position? ols
We closed the previous long trade a
css
0.0

at close to the top of wave 5. At c-A b

Previous top 3 support
that point you expect an ABC a 100.0
50.0
oss cls
correction wave, possibly with 161.8

some 50% retracement of the 261.8

previous wave 5, but in many

cases, a retrace related to the
complete 1-to-5 impulse wave Close Short Position
csl c-C
423.6

is very common. Let’s wait and 4 0.0

see how price develops from the

top of wave 5.
Figure 4 is a continuation of
Figure 3. A first level of reaction
is normally a 50% retrace over FIGURE 4: OPENING A POSITION AT A LINE BREAK STOP LEVEL. A long or short position can be opened at a stop
the last wave-5 up. Drawing a level when price breaks the trendline.

32 • June 2019 • Technical Analysis of Stocks & Commodities

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 top we can draw a cll horizontal line for
closing the long position at a limit with
a profit.
On the other hand, if you have an
open short position, you draw the css
c-B css 0.0 horizontal resistance line just above
Opened Long Position
a the last wave-b top to close the short
position at this stop-loss level. Creating
osc
a Fibonacci down projection over the
b 100.0 last a-b correction (light blue), you see a
A 423.6% target level, On the other hand,
if you have an open short position, you
161.8
draw the css horizontal resistance line
just above the last wave-b top to close
the short position at this stop-loss level.
Creating a Fibonacci down projection
csl 261.8 c over the last a-b correction (light blue),
you see a 423.6% target level, which
FIGURE 5: REVERSAL. Here, an opposite trade is opened with the osc [open short close] stop line. is also close to the low of the previous
correction wave 4. You can draw a price
target level with a csl horizontal line a
trendline through the top of wave-5 and the top of the B-wave, bit above the 423.6% Fibonacci target for closing the short
and we name it ols to open a long trade at a stop level. If price trade with a profit.
goes up through this line, a long position will be opened. If any of the targets are reached, all trading lines will be
On the other hand, we can capture a downward continuation removed from the chart.
by drawing a horizontal support line at the 50% retrace level
just below the low of the a-wave, and we name it oss to open Opening an opposite position
a short trade if the index falls below this support line. In Figure 5 there is a technical reversal with higher bottoms
Because we use by default [OCA = One Cancels All] = and higher tops after a downward correction wave. When
TRUE, once one of the two possible orders execute, both price breaks the last high of the upmove reversal, you decide
trendlines are removed automatically. to open a long position.
In case you cannot follow up on the trade, it is good practice However, you have some doubt, because the downward move
to set a stop-loss and a profit-target order for closing the open up to that point may be only a correction wave A, in which
position. In case you have an open long position, you draw case the index will make a limited B-wave up correction only,
the blue cls line for closing the long trade at a technical stop- continuing the previous downtrend after the correction for a
loss level. With the index moving up, the first main target is correction wave-C.
breaking the previous top of wave 5. Here, a bit below this With that in mind, if price moves up, no problem, just try to
estimate a price target to close
the trade with a profit. However,
5-(3) if price moves further down after
the short-term correction, what
161.8

llb
v-3 can you do?
The index finds resistance
(4)
iii
4 at the level of the 200-bar
[1] 100.0 SMA and the upper side of the
Bollinger Band. Price starts
iv
moving down after a small abc
i
B zigzag correction. This may be
1 the beginning of the previous
ii downtrend continuation. If not
(1)
already done, it’s time to take
2
A some action.
C-[2] (2) Draw a horizontal line at the
0.0

previous price support in the up

FIGURE 6: EXPERT SYSTEM TRADE. This shows an example of closing an open long position breaking a long limit block reaction and name it “osc.” If
line, and blocking any new automatic trade. price falls through this osc line,
34 • June 2019 • Technical Analysis of Stocks & Commodities
the open long position will be closed with a loss while open-
ing an opposite short position. With price moving down, you
expect a C-wave with about the same size as the first A-wave
down. That will compensate for the loss of the long position
and still make a nice profit with the current short position.
Now let’s prepare to close the short position automatically.
First, you make sure that the short position closes with a
small loss if things once more go the wrong way. You draw
a css resistance line above the top of the B-wave correction.
Should price move above this line, the short position will be
closed with some loss.
Next, you construct a downward target Fibonacci projec-
tion over the B-wave correction. The 261.8% target has a size
on the order of the A-wave length. You draw a horizontal csl
target line above this Fibonacci target to close the trade at a
short limit price.
Close on stop and open opposite position
In Figure 6 you get an expert open buy signal from the digital
indicator at the chart bottom moving up from wave (2). A long
position is opened. Analyzing the move up to that point, the
top of a wave [1] was reached and a downward move started
for wave [2]. This was logically an ABC correction wave. From
that bottom, there is a wave (1) up with correction wave (2),
followed by another wave 1 of a lower degree. In this up move,
the buy long signal automatically opens a long position.
You are now expecting a wave [3] above the wave [1]. An
impulse wave 3 type is a larger move that will be followed by
a limited correction wave 4. Smaller correction waves usually
create buy and sell signals in a trend-following expert, but
mostly these trades are not profitable, and thus, it is better to
stop trading around the wave 3 top and get back in after the
correction wave 4 completes.
How can you do that without being in front of the screen
all the time? You can just make a Fibonacci projection over
wave [2] that gives a first price target at 161.8%. Just below
that you create a long-limit-block (llb) line to close the long
trade when this target is reached. Furthermore, this type of
line will at the same moment block the opening of any new
automatic trade. That way, you avoid losing automatic trades
during a price correction phase. This blocking will stay in
effect for as long as this line continues to exist on the chart.
Once you estimate that the correction wave (4) is completed,
you can use the auto-trading signal to start another long trade
for the completion wave (5)-[3] up.
Next time: fully
automatic trading
In part 12, which will be the third
part on the expert system, we’ll
start looking into fully automatic
trading.
Sylvain Vervoort is a retired
electronics engineer who has
been studying and using technical
analysis for more than 40 years. Currently, he experiments
with trading forex and CFDs with rule-based systems. His
book Capturing Profit With Technical Analysis received a
bronze medal from the 2010 Axiom Business Book Awards
in the category of investing. His Band Break System Expert is
available on DVD. Vervoort may be reached at sve.vervoort@
scarlet.be or via his website at http://stocata.org.
Further reading
Vervoort, Sylvain [2018]. “The V-Trade, Part 1: Five Basic
Trading Rules,” Technical Analysis of Stocks & Com-
modities, Volume 36: March.
[2018]. “The V-Trade, Part 2: Technical Analysis,”
Technical Analysis of Stocks & Commodities, Volume
36: April.
[2018]. “The V-Trade, Part 3: Technical Analysis—Fi-
bonacci Projections And Daily Pivots,” Technical Analysis
of Stocks & Commodities, Volume 36: May.
[2018]. “The V-Trade, Part 4: Technical Analysis—
Trends & Reversals,” Technical Analysis of Stocks &
Commodities, Volume 36: June.
[2018]. “The V-Trade, Part 5: Technical Analysis—
Moving Average Support & Resistance And Volatility
Bands,” Technical Analysis of Stocks & Commodities,
Volume 36: July.
[2018]. “The V-Trade, Part 6: Technical Analysis—
Divergence Indicators,” Technical Analysis of Stocks &
Commodities, Volume 36: August.
[2018]. “The V-Trade, Part 7: Technical Analysis—V-
Wave Count,” Technical Analysis of Stocks & Commodi-
ties, Volume 36: September.
[2018]. “The V-Trade, Part 8: The Basic Trading Rules,”
Technical Analysis of Stocks & Commodities, Volume
36: October.
[2018]. “The V-Trade, Part 9: Trading Examples,”
Technical Analysis of Stocks & Commodities, Volume
36: November.
[2019]. “The V-Trade, Part 10: Trading With Lever-
age,” Technical Analysis of Stocks & Commodities,
Volume 37: April.
[2019]. “The V-Trade, Part 10b: The Expert System,”
Technical Analysis of Stocks & Commodities, Volume
37: May.
[2009]. Capturing Profit With Technical Analysis:
Hands-On Rules For Exploiting Candlestick, Indica-
tor, And Money Management Techniques, MarketPlace
Books, Inc.
[2012]. Ground-Breaking Band Indicators: Newly
Discovered Tactics for Timing Profit, DVD, http://stocata.
org. Includes an autotrading expert system.
‡MetaTrader4 (MetaQuotes Software Corp.)
‡See Editorial Resource Index
†See Traders’ Glossary for definition
June 2019 • Technical Analysis of Stocks & Commodities • 35
 INTERVIEW

It’s All About The Bands

Talking Volatility
With John Bollinger
John Bollinger is best known for creating Bollinger Bands. Traders and in-
vestors worldwide use these bands to help assess expected price action in the
financial markets, and the bands are a feature found in most financial chart-
ing software and charting websites. His book Bollinger On Bollinger Bands
has been translated into 12 languages. Bollinger is the recipient of several
major achievement awards—among them, the Technical Securities Analysts
Association of San Francisco Lifetime Award For Outstanding Achievement In
Technical Analysis; the 2005 CMT Association Annual Award For Outstanding
Contribution To The Field Of Technical Analysis; and the IFTA 2015 Lifetime
Achievement Award. His website, www.BollingerBands.com, provides educa-
tional materials, access to the Bollinger Bands Letter, and information about
Bollinger Band Tool Kits on various platforms. The site www.BollingerBands.
us provides charts, trading systems, and trading signals for investors.
Stocks & Commodities Editor Jayanthi Gopalakrishnan spoke with John
Bollinger on April 16, 2019 about his renowned bands and his insights into
market volatility based on years of experience and analysis.

It’s been a while since we how volatility behaves among traders

spoke. What have you been
up to in the last few years?
The most significant thing
I have been focusing on over
the past years is continuing to study
volatility. I think that despite volatility
having been studied virtually endlessly
by academics and practitioners, it is still
poorly understood. All you have to do
is look at a volatility event such as the
one we got last December and then read
the articles in the financial press about
it. You will see that even though we’ve
come a long way in the study of volatil-
ity, people—other than those who spend
their lives studying volatility—really
don’t understand it.
Bollinger Bands are driven by volatil-
ity and there are a number of other tools
in the technical analysis toolbox that are
volatility-based. So I’ve been spending
a lot of time thinking and working with
those types of tools.
And what are some of the things that
you’ve discovered or found out?
I think the common conception about
36 • June 2019 • Technical Analysis of Stocks & Commodities
and portfolio managers isn’t correct.
People believe volatility is mean-
reverting. All you have to do to see
that is a misconception is look at an
indicator like the CBOE’s Volatility
Index (VIX), which is a chart of the
implied volatility of the basket of S&P
500 options. The academic assumption
is that volatility is mean-reverting, in
that there’s some normal or middle level
for volatility and after you get a burst
of high volatility, it comes back to that
mean level. Or, if you’re at very low
levels, volatility will rally to that level.
But that’s just not the case.
Volatility is what we call extreme-
seeking, that is, very low volatility is
not a forecast for average volatility.
It’s a forecast for high volatility. And
very high volatility is not a forecast for
average volatility. It’s a forecast for low
volatility. And that’s the mistake that
lies at the heart of much of portfolio
management today.
For example, there’s a popular algo-
rithm called VaR—value at risk. There
are many versions of it and many differ-
The interesting thing we
discovered is squeezes
are where trends are born,
and bulges are where
trends die.
ent implementations. But they all work
essentially the same way. Basically, it
says that when volatility is low, you
should take large position sizes. And
when volatility is high, you should take
small position sizes. But really, you want
to do exactly the opposite. If volatility
is low—very low—you want to be very
cautious and take very small position
sizes. And when volatility is very high,
at extreme levels, that’s when you actu-
ally want to step in with some capital
and take large position sizes.
We saw this in action in 2006–2007,
when professional portfolio managers
had just adopted the gospel of VaR. And
coming into the financial crisis was a
very low-volatility time. And they had
the largest positions they could have
coming into that period. So when the
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 new low in price that’s not squeezes are where trends are born, and
a new low in relation to the bulges are where trends die. So, typically,
Very low volatility is not Bollinger Bands. in a short- to intermediate-term trend,
a forecast for average So that’s how volatility you’ll see that it often starts in the area
volatility. It’s a forecast for can be helpful because we’re of a squeeze and ends in the area of a
using volatility to define bulge. So again, we’re using volatility
high volatility. “relatively high” and “rela- to help define what’s going on in the
tively low” in that analytical marketplace rather than just looking at
framework. We can use that price structure or indicators.
market started to collapse, they were to identify a price pattern. By doing so,
hurt very badly. we can accomplish several things. First, I read somewhere that you started ob-
That’s the conundrum of volatility. we can help eliminate the emotions in the serving volatility by studying options
There is a widely held assumption about trading process because we have a set of prices. What did that reveal to you?
how volatility behaves that’s incorrect. rules we follow to identify a W bottom That’s absolutely true. I started in this
But people who have studied volatility rather than trying to guess at it. Second, business as an options trader. In order to
and who have lived with volatility over we can find a location to place a trade be a successful options trader, you have
the years understand that the proper where the odds of success are in our favor to have a handle on volatility, especially
approach is to do the opposite of what a and the amount risked is much less than the estimated volatility in the next 30
VaR model recommends. the potential amount gained. days or so. In those days, we were using
Those two advantages get at the two hand calculators and basically we just
And that makes sense because when basic dynamics of trading systems. There used rules of thumb, guesses based on
volatility is low, nothing much happens, are really only two ways to improve your prior market activity.
so why put on such a huge risk? trading performance: You can improve I was lucky to have an early PC. It
Exactly. When is volatility extremely the number of winners relative to number wasn’t actually a PC. We called them
high? It’s extremely high at market bot- of losers, and you can improve the aver- “microcomputers.” One day I copied the
toms, like we saw at the end of last year age size of your winners relative to the formula for volatility down a column on
on December 24, 2018—there was a huge average size of your losers. Of course, a spreadsheet called SuperCalc, an early
peak in volatility. The traditional think- there’s another dimension, drawdown, version of a spreadsheet and I noticed
ing is that you either do nothing or you but we’ll leave that for the meantime. that volatility was changing over time.
put on very, very tiny positions. What you At the time, we used fixed-width trading
actually want to do is the opposite—you That’s interesting. Have you put all bands, that is, a moving average that was
want to put on big positions. these together to create a new trading typically shifted up and down by some
We see this all the time in relation to system? percentage.
Bollinger Bands. Let’s look at a very We partnered with an Italian firm, That was always a problem because
sharp move down for a moment. If you Traderlink, and created a website named your emotions would come into the
have a big decline in a market, and it’s bollingerbands.us. It is based on an process. When you set the width of the
strong enough that price actually gets earlier website we had, bollingeronbol- trading bands if you were bullish, you
outside of the lower band and then we lingerbands.com, but they have taken it painted a bullish picture with the bands.
get a relief rally back inside the bands, to another level with new technology. It If you were bearish, you painted a bearish
we call that the momentum low. What is both computer-friendly and mobile- picture. I was looking for a way to have
usually happens is it comes back to retest friendly. It provides access to all of the the market automate setting the width of
that low, it sells off again, and you make Bollinger Band tools for the US market, the bands. I saw volatility changing over
a new low inside the Bollinger Bands. forex, futures, commodities, indices, and time. This was the historic volatility of a
The reason it’s inside the Bollinger funds. More importantly, it provides ac- stock that I was trading options on. And
Bands is volatility has expanded so much cess to screening for Bollinger Band op- I thought that might be a really useful
that the lower band has been driven portunities like W bottoms or squeezes, tool for setting the width of the trading
dramatically lower. So even though price which are the most popular for Bollinger bands. And after a couple of iterations,
may be making a low that’s roughly at Band trading. You can also screen for the I had Bollinger Bands.
the level of the prior low, the lower band opposite of a squeeze—a bulge, which So it all came directly out of options
is dramatically lower than it was at the is another very popular way to trade trading. What we misunderstood at the
first low. We have a nomenclature for Bollinger Bands. time is that we thought volatility was a
those two lows—we call the first one the In terms of what we were talking constant. And it turned out that a Nobel
momentum low and the second one the about earlier, a squeeze simply indicates Prize was awarded to economist Robert
final or price low. Together that pattern extremely low volatility and a bulge Engle for the observation that volatility
forms a “W” bottom. I like to say that indicates extremely high volatility. The was in fact volatile. This led to the de-
a “W” in Bollinger Bands terms is a interesting thing we discovered is that velopment of the ARCH model.
38 • June 2019 • Technical Analysis of Stocks & Commodities
 Observing volatility change by glanc-
ing at my spreadsheet columns made me
question all of the assumptions about
volatility that we took for granted as an
industry. Eventually I figured out that
when volatility was very low, it was a
forecast for higher volatility. And when
volatility was very high, it was a fore-
cast for lower volatility. And with that
in mind I was able to be a much better
options trader.
But these work just as well for other
trading products.
Yes, that’s what is interesting. Volatil-
ity is a universal constant. People say they
hate volatility, but when you buy a stock,
you buy it in anticipation of volatility.
You want the stock’s price to change,
hopefully in your direction. But really,
you’d like to see a lot of volatility. You
want it to go up dramatically. So while
we don’t often express it this way, what
we actually trade isn’t the price of a stock.
We trade the anticipation of volatility,
again, hopefully in our direction.
So, going back to the charts on bol-
lingerbands.us, is there a focus on your
indicators?
Bollingerbands.us offers the entire
suite of Bollinger Band tools. My original
idea when I developed the tools was just
Bollinger Bands and two helper indica-
tors, %b, which tells us where we are
in relation to the Bollinger Bands, and
BandWidth, which tells us how wide
the Bollinger Bands are. Over the years
we’ve developed a number of other
supporting tools and all of those are
available on bollingerbands.us, along
with other technical analysis tools that
I think are very important. We have a
full implementation of both BBStops
and chandelier stops. And it’s all very
easy to use.
You can use the indicators and screen-
ing tools to help plan for and select your
trades, and then any time you enter a
trade, with a couple of clicks you can
place a stop underneath that trade if it’s
long, or above the trade if it’s a short.
If you want a progressive stop, you can
use the BBStops. They increment every
day no matter what. Or if you want a
stop that is driven by the price progress
within the trade, you can
use our chandelier stops.
I think the rapid and easy Despite volatility having
implementation of stops to been studied virtually
go along with your trades endlessly by academics
is a very helpful feature for
traders. And of course, the and practitioners, it is still
stops are remembered from poorly understood.
session to session. If you
are short XYZ, any time
you bring up that stock on a chart, that indicator or volume indicator. If that
stop will stay on the chart for you, along volume indicator is positive, then it gives
with any other setups you’ve included a buy alert. In both cases, we wait for the
on the chart. market to confirm the signal. If we get a
buy alert from the reversal system, we
It looks nice. I was playing around wait for the first strong up day and that’s
with it. I really like the analysis feature our signal day. By doing so, we improve
where it has that wheel you navigate our odds of success, which is, as we talked
around. about before, one of the main avenues
That wheel is a great way to get a snap- of being able to improve your trading
shot of information about the security performance. On BollingerBands.us, in
you are looking at. It’s easy to use with addition to providing lists of stocks that
your mouse on a desktop computer, but currently qualify for each of the methods
I really like it on mobile devices because updated daily, you can add the signals
you can use your finger to drag it around. to your charts.
That’s the basic navigation system for all
of the on-chart functionality and that’s And how can people gain access to the
some of what I was referring to earlier work you do?
when I talked about the powerful tech- We provide a service to all US stock
nology we’ve been able to implement. market traders each week on our regular
Many users really like the trendline website, bollingerbands.com. We publish
functionality as well, but the ability to a free market timing chart pack. You can
screen for W bottoms, squeezes and find it near the bottom of the page. The
bulges, and my methods are really the chart pack has 30 classic market timing
favorites on the site. charts of all sorts. Some are Bollinger
Bands-based but some are like the high/
I wanted to talk a little bit about the low index or new highs and new lows. We
methods you use—volatility breakout, cover the Titanic syndrome, Hindenburg
trend-following, reversals, and break- omen, and a number of other market tim-
outs. Are those the four methods you ing signals. We do some breadth work for
subscribe to with Bollinger Bands? the indexes. We do an advance–decline
The first three—volatility breakout, line for the Russell 1000, 2000, and
trend-following, and reversal method— 3000 and we do new highs and lows for
were presented in my book Bollinger the Russell indexes and for the Nasdaq
On Bollinger Bands. They are basic Composite.
demonstrations of how to couple Bol- By flipping through these 30 charts
linger Bands and indicator action. The each week, you get a good feel for what’s
trend-following method, for example, going on in the US stock market. And
asks this question: “If we’re at the upper there’s a little bit of information at the end
band, do indicators confirm?” If they of the chart pack about the international
do, then it suggests price is in a trend- markets as well. It’s free and we usually
following mode. post it on Saturdays. Occasionally, if the
The reversal system does the opposite. market is really volatile, we’ll update it
So, for example, if price goes down and during the week.
tags the lower band, the reversal system
looks at an accumulation/distribution Continued on page 56
June 2019 • Technical Analysis of Stocks & Commodities • 39
 PRODUCT REVIEW

The 3S Code
SEASONAL SWING TRADER entry level, stop-loss, and the potential Regardless of the timeframe selected,
Website: seasonalswingtrader.com first and second targets (see Figure 2). the first step begins when the algorithm
Requirements: Works with paints a green arrow on the chart each
thinkorswim, TradeStation v.9 or Catch swing highs time price makes new highs in an up-
v.10, NinjaTrader v.8, or MetaTrader4 and lows trend or new lows in a downtrend based
platform The algorithm searches for prices mak- on the algorithm’s lookback period. The
Product: Indicator and scanner for ing new highs or lows based on certain green arrows point to the direction of the
locating price swing top and bottom lookback parameters. The default is a expected reversal. For example, they face
reversals daily timeframe, but on weekly charts up as price is declining in anticipation
Price: $399 one-time fee it looks for multi-week highs or lows of a price bottom. The last green arrow
and on intraday charts it looks for prior is called, but not labeled, point 1. Red
by Barbara Star, PhD session highs or lows. arrows represent step 2 during price

O
The daily chart of the stock Allergan pullbacks and countertrend rallies. The
ne of the skills traders strive to shown in Figure 2 illustrates the method final red arrow marks the end of step 2
achieve is the ability to iden- used to identify and trigger the 1-2-3 and is point 2. Blue arrows occur in step
tify a change in price trend as bottoming pattern. The algorithm caught 3, as price retests the step 1 top or bot-
early as possible. Silas Peters the December 2018 trend reversal, which tom. The final blue arrow is considered
has made it even easier to identity those signaled the end of the large decline from point 3.
changes with his recently launched prod- the October highs and the reversal to A trade is triggered when price moves
uct, The 3S Code. The goal is to find a the upside in early January 2019. Price beyond the final red arrow at point 2.
pattern that reverses the prevailing trend rebounded 15 points when it hit both the A chevron appears as soon as price
in any timeframe for the stock, ETF, first and second targets. breaches the final red arrow at point 2 and
commodity, and forex markets. a blue horizontal line appears to mark the
Essentially it is a three-step reversal 1-2-3 Reversal Pattern suggested entry level. The chevron and
process that occurs when price fails to blue entry line identify both the trigger
1-2-3 Top 1-2-3 Bottom
make a new high or low as it retests a and the price location of the trade.
price top or bottom. This is a well-known 1 Based on price action, the algorithm
2
pattern, sometimes referred to as a 1-2-3 3
also calculates an initial stop-loss (red
(Figure 1), an A-B-C, or its close relative, line) plus a potential first target (light
an M top & W bottom. 3 green line) and a second target (dark
The 3S Code—a product that can be 2 1 green line). As long as price does not
used on the thinkorswim, TradeStation, move beyond the red horizontal stop-loss
FIGURE 1: THE 1-2-3 PATTERN FORMATION. Based
NinjaTrader, or MetaTrader4 platform— on price action, the 1-2-3 formation is a well-known line, the trade is active.
automates the process. Rather than label trend reversal pattern. Once triggered, the trade is consid-
the endpoints with ered void if price
the numbers 1, 2, violates the red
and 3, the code line at point 1 or
identifies and prints if price does not
THINKORSWIM WITH SEASONAL SWING TRADER

each of the three penetrate the blue

steps with different horizontal line. No
colored arrows as trade is entered
they are occurring. if price does not
Once all three steps reach the trigger
are identified and point, as seen on
the pattern triggers, the left-hand side of
a chevron symbol the Allergan chart
shaped like the tip in early December.
of an arrow appears When those condi-
on the screen as FIGURE 2: ALLERGAN DAILY CHART WITH THE 3S CODE. The automated 3S Code uses colored arrows
to identify each step of the 1-2-3 pattern. Once a signal is triggered, the horizontal lines display the blue entry,
tions occur, a new
do four horizontal red stop-loss, and light green first target and dark green second target price levels. Here, it signaled the bottom count begins.
lines that mark the reversal that occurred in late December and early January. Because the al-
40 • June 2019 • Technical Analysis of Stocks & Commodities

FIGURE 3: THE 3S CODE WITH CRUDE OIL FUTURES SEASONALITY. The 3S Code can be used in conjunc-
tion with seasonal patterns like the one seen here to the right of the crude oil futures chart.
gorithm is based on specific new high and
low lookback periods, users may see other
1-2-3 patterns that are not marked. How-
ever, users are able to increase or decrease
the lookback period to see other signals,
such as new 52-week highs or lows. Users
can also change any of the colors.
Trading with The 3S Code
Both video and written instruction
manuals make installation and learn-
ing to trade the 3S Code strategy very
straightforward. In fact, some traders
may feel so comfortable following the
signals that they might wish to use it as
a standalone indicator. And an advanced
trader using skillful risk management
might find that a profitable avenue to
follow. However, The 3S Code is a
countertrend strategy. Its algorithm
is looking for a trend-reversal pattern
instead of a buy-the-dip continuation
pattern. Corrections in strongly trend-
ing markets often produce signals that
either do not trigger or produce small
profits or losses when they do trigger.
Fortunately, the training material offers
suggestions for filtering and confirming
the signals with technical indicators to
improve trading results.
Traders who follow seasonal patterns
will find The 3S Code a useful trading
companion. Figure 3 shows a split screen
with both a price chart that contains the
3S Code indicator and a seasonal direc-
tional chart of the crude oil futures mar-
ket in the November to December 2018
timeframe. The seasonal chart indicated
a potential price decline during that time
period. The 3S Code signaled a potential
topping pattern, which did trigger in
early November. Price not only met but
overshot the first and second downside
targets. Traders could have taken profit at
those targets or continued trading using
The 3S Code offers
traders an easy-to-
use program that
automatically locates
a frequently occurring
price pattern and
provides a strategy
for trading it.
a trailing stop. Stock traders also could
have participated with energy ETFs or
options. During the strong downtrend,
The 3S Code gave several potential 1-2-
3 pattern bottoming alerts but no false
reversal entry signals.
FIGURE 4: 3S CODE SCAN RESULTS. This is a partial list of optionable stocks close to triggering a potential bot-
tom reversal signal that was found using one of the four scanning options provided in The 3S Code program.
June 2019 • Technical Analysis of
Scan for trades
By itself, the 3S Code indicator is a
valuable tool, but the addition of a scan-
ner makes it a big time saver. There are
actually four scanning features, each
of which eliminates the need to check
out hundreds of charts in order to find
trading opportunities. Two scans focus
on charts that display either a topping
or a bottoming pattern that are in the
final stage but have not yet triggered.
The other two scans locate charts that
have recently triggered a topping or
bottoming pattern. All the scans may
be run in any timeframe. (Note: At the
time this review was being written, the
MetaTrader4 platform did not offer scan-
ning capabilities.)
The list seen in Figure 4 found 26
stocks on a daily bottom reversal scan
that had not yet activated a trade. It would
be easy to flip through the charts on this
list and save those that seem most prom-
ising to a watchlist for further analysis
and a potential entry signal.
Conclusion
The 3S Code offers traders an easy-to-
use program that automatically locates
a frequently occurring price pattern and
provides a strategy for trading it. Its trig-
gering mechanism provides clear entry
and exit levels. To its credit, the program
does not erase, eliminate, or repaint any
signals. You see them all, which allows
for a more realistic profit/loss expecta-
tion. It only remains for the trader to
decide whether the entry, stop/loss, and
Continued on page 62
Stocks & Commodities • 41
 Explore Your Options

Got a question about options? Jay Kaeppel has over three decades of experi-
ence in the options markets. He was a head trader for a CTA firm, an options
trading software developer, and is a portfolio manager for an investment
management firm. He also spent several years writing a weekly column titled
“Kaeppel’s Corner” and now publishes a blog, “Jay On The Markets” (http://
jayonthemarkets.com). He is the author of several books, including The Four
Biggest Mistakes In Option Trading; The Option Trader’s Guide To Probability,
Volatility, And Timing; and Seasonal Stock Market Trends. Send your ques-
tions or topic suggestions to Jay Kaeppel at jaykaeppel@gmail.com. Selected Jay Kaeppel
questions will appear in a future issue of S&C.

PLAYING MARKET VOLATILITY WITH
RATIO BACKSPREADS
I keep hearing that there are ways to take
advantage of low (and/or high) volatility
via the use of options. Can you give me
an example?
Absolutely. Extremes in volatility can
offer option traders many opportunities
that aren’t available to stock traders.
Let’s look at one example. The iShares
Silver Trust (SLV) is an ETF designed
to track the price of silver bullion. As of
the date in question (see Figure 1), there
are a few key factors:
• Price action has been basing for over
3.5 years and (granted, as usual)
there is rampant speculation that
silver and other precious metals are
setting up for a significant burst to
higher prices
• Implied volatility on 90-day options
on ticker SLV has plummeted to
the lowest level ever recorded for
SLV options.
There is no way to know when vola-
tility will stop falling, or when it might
make a meaningful reversal to higher
ground. But the one thing we know for
now is that SLV options are about as
“cheap” as they have ever been in terms
of low time premium. Another thing we
know for sure is that longer-term options
react more to changes in IV than shorter-
term options. A trader can assess this by
looking at the greek variable known as
vega for each option. Vega tells you how
much the price of that option will rise (or
fall if vega is negative) if volatility rises
by one full percentage point.
A situation where we are looking for
a strong price move but are unsure of
the timing, combined with low IV, is an
ideal time to consider a strategy most
commonly known
as the ratio back-
spread, or long
ratio backspread
(heretofore, “back-
spread” for short).
A ratio backspread
defined
A call ratio backspread involves selling
a lower strike price call and buying a
greater quantity of higher strike price
calls. In the following example, we will
focus on very long-term options for two
reasons:
• We want to give SLV as much time
as possible to make a significant
price move
• We know that a subsequent rise in
implied volatility will have more of
an effect on long-term options than
on short-term options.
A backspread example
The trade that follows should be consid-

WWW.OPTIONSANALYSIS.COM

FIGURE 1: “CHEAP” OPTION. Price is roughly unchanged from 2015 and implied FIGURE 2: CALL RATIO BACKSPREAD. This shows the SLV Jan2021 call ratio
volatility is at an extremely low level—that is, SLV options are “cheap.” backspread.

42 • June 2019 • Technical Analysis of Stocks & Commodities

Explore Your Options
ered nothing more than to the next trade. Barring
an example. The trade a sharp rise in implied
we will consider is: volatility, chances are, in
this scenario we would
Buying 10 Jan2021 16 be closing the trade with
calls @ $1.23 a small loss. Figure 3
Selling 5 Jan2021 13 displays the expected
calls @ $2.58 risk curves one year from
the date of entry and
The particulars of the assuming no change in
trade appear in Figure 2. implied volatility. Notice
This trade takes in a that the maximum risk
credit of $60. This would drops from the original
be our profit if we held the -$1,440 to somewhere in
trade until Jan 2021 expi- FIGURE 3: RISK CURVES. This shows the expected risk curves one year from date of entry
the range of just -$350.
assuming no change in implied volatility.
ration and SLV was below
$13 a share. Despite this, If volatility
the capital requirement is rises
equal to the maximum Now let’s assume that im-
risk on the trade, which plied volatility does co-
is $1,440. The good news operate and somewhere
is that this maximum loss along the way increases
will only occur if we hold by 40% from current
the trade until expiration levels. This would mean
and SLV happens to close the dark black line in Fig-
at exactly $16 a share on ure 1 would rise from its
that day. In other words, current level of roughly
we have a lot of control 15% back up to roughly
when it comes to limiting 21%—hardly an astro-
our risk. nomical move. Because
As you can see in we are long more options
Figure 2: than we are short, and
• If SLV soars in price, because we have positive
this trade can make vega, a sharp rise in im-
a large return plied volatility will shift
the risk curves to higher
• If SLV collapses in ground as displayed in
price, our loss actu- Figure 4.
ally gets smaller FIGURE 4: RISK CURVES. This shows the expected risk curves one year from date of entry This hypothetical trade
the more price de- assuming implied volatility rises 40% from current levels. is just one example of the
clines many ways a trader can
historical long-term range, which take advantage of extremes in volatility
• The longer that SLV remains in a would serve to inflate the value via the use of options.
price range, the larger our loss be- of this position (note the positive
comes due to time decay (note the “vega” displayed in Figure 2).
negative position “theta” displayed
in Figure 2). From a trade management
point of view Extremes in volatility
There are two potential primary driv- Since this is a hypothetical trade, let’s can offer option traders
ers for this trade: come up with a hypothetical trade plan. many opportunities
• Silver must make a meaningful First off, we know that the passage of that aren’t available to
move in price at some point time works against this trade. So let’s
assume we hold this position for a maxi- stock traders.
• We are looking for implied vola- mum of one year. If SLV fails to move
tility to advance back up into the higher by that time, we will simply call it
a day (or in this case, a year) and move on
June 2019 • Technical Analysis of Stocks & Commodities • 43
 Be Mindful Of These
How To Avoid Typical
Trading Mistakes
Sometimes knowing what not to do is as important as knowing
what to do. To help you overcome any obstacles that may get
in the way of your trading success, here are some suggestions
to help smooth the way.
T
by Fawad Razaqzada
he road to learning how to trade well can be steep. But
take heart: Newer traders can shorten the learning curve
and minimize mistakes by following some guidelines.
In this article, I’ll offer some practical pointers, mostly
gathered from my own experience. I hope these sug-
gestions will help you improve your trading experience.
In my article last month, “The Importance Of Being Suf-
ficiently Capitalized,” I discussed some of the problems that
being undercapitalized can lead to, and why being sufficiently
capitalized is important for maximizing your chances of
success. However, having a sufficiently capitalized trading
account is only part of the solution. Developing traders also
face other obstacles, some of which can be easily rectified.
Here are some points to take into consideration.
44 • June 2019 • Technical Analysis of Stocks & Commodities
What good traders do
Avoid averaging down
It is not unheard of that some speculators blow their whole
trading account when they get “stuck” in one bad trade. Instead
of cutting the loss early, they add more to bring the average
price closer to the market—only now, the risk of a margin call
or liquidation has increased by twofold. This deadly trading
sin is called averaging down. There’s nothing wrong with this
method of averaging into a trade if that was the intended plan
from the outset, where the trader “works” a level by entering
partially as price fluctuates around a key support or resistance
zone. But it becomes a problem when doubling down, having
already risked a full 1R (where “R” is the dollar risk per trade
and is an alternative way of looking at a profit vs. loss ratio)
on the initial entry, which is now well underwater.
What’s more, some newer traders “revenge-trade” by going
FOXY BURROW/SHUTTERSTOCK
back in as soon as they are stopped out and do so without any
plan or confirmation that price has turned. What typically
happens here is that the reentry or the averaging down turns
out to be the wrong decision as the market gathers momentum
and goes in the “wrong” direction even further. As a result,
 TRADING PSYCHOLOGY
things get ugly really quickly. With all their focus now oc-
cupied by this one big losing trade that has gotten out of
control, they miss out on other potentially profitable setups
in other markets. These types of mistakes happen especially
when traders try to bottom-pick or top-pick and/or when they
chase sharp moves.
Stop-loss placement is key, as long you honor it
What’s more, newer traders tend to keep adjusting their
stop-loss orders as price moves against them, hoping that the
market will turn around and allow them to exit at breakeven.
While this tactic may work from time to time, especially in
range-bound conditions, it is definitely not recommended.
What can and will happen is that price may continue going
in the “wrong” direction until it gets to the point where the
trader is forced to take on a much larger loss than would
have been the case if he or she had stuck with the original
plan and accepted a 1R loss. In one bad trade, the trader
could potentially severely damage his or her trading account
balance, not to mention the emotional and other costs he or
she would incur.
To avoid falling into this trap, newer traders should consider
making their stop-loss orders extra wide (and therefore have
smaller position sizes to compensate for giving the trade extra
room to work). Extra wide stop-loss orders will help prevent
short-term noise from stopping you out prematurely. The
stop-loss should be just beyond a price level where, if reached,
it should tell the trader that the idea has become invalid. As
experience grows, traders will be able to tighten their stops
and become better at entering at better levels, allowing them
to open larger position sizes for the same percentage risk per
trade and therefore have better reward-to-risk profiles (or
make more “R” on winners).
Prevent the onset of FOMO
Trading impulsively based on the fear of missing out (FOMO)
or fear of regret is very common with retail investors new to
the market. Avoiding FOMO is easier said than done. When
the markets move sharply, people tend to get excited and enter
just before price turns and goes the other direction. Think,
for example, of bitcoin when it was rallying sharply late in
2017 before the bubble burst. I wonder how many of those
“hodlers” (“hold on for dear life”) who bought near the highs
are still in the game.
With experience, traders will become better at resisting the
temptation to chase. But what can newer traders do to avoid
falling into this trap?
1. Employ objective trading strategies that involve very
little or (ideally) no subjective decision-making. For
example, incorporate moving averages and Fibonacci
levels into entry and exit rules.
2. Trade based on higher-timeframe charts, such as the
daily, and don’t watch intraday price action.
3. Plan trades in advance. This way, you will know exactly
Seasoned traders know the
importance of sitting on their
hands and not doing anything
when the market conditions
are not right for their way of
trading.
at what point your trade would be wrong and you will
know where the profit target or objective is.
As experience grows, traders become better at reading price
action so they could potentially cut a trade well before it hits
their predefined stop-loss for a full 1R loss. Indeed, getting
used to taking small losses is a skill that can significantly
improve results, even if your strike rate stays constant. Learn
to see taking small losses as a necessity rather than being
disappointed by them. Remember, a good trader should be
able to make money even if less than half of the trades are
winners. This is because you will be paying yourself more for
the winners while reducing the cost of losing trades.
The importance of being selective and limiting
recency bias
Another typical mistake aspiring traders make is that they want
to be constantly involved in the markets, rather than being
selective and patient. Seasoned traders know the importance of
sitting on their hands and not doing anything when the market
conditions are not right for their way of trading. Conversely,
most newer traders will not even be aware of this fact and
they often employ a one-size-fits-all solution to their trading
decisions. Their trading frequency tends to increase after a
winning run, sometimes taking on trades that would otherwise
not have been considered. This is known as recency bias. In
contrast, think of professional poker players. They have the
patience required to fold many weak hands at small costs, while
ready to go large on premium hands that inevitability show
up. Most of these professionals do not suffer from recency
bias, since their big winners will have no bearing on the next
hand. Aspiring traders, on the other hand, tend to keep giving
back solid gains by overtrading poor setups, mainly because
of recency bias, revenge trades, and FOMO trades.
Thus, to avoid making these types of mistakes, grasp the
importance of doing nothing. Always remember that the
markets will be there long after we are gone, and that this
is a marathon, not a race. When market conditions are not
right, traders need to be aware of this fact and sit it out. It
all comes down to knowing your strategy inside out, back to
front, and top to bottom. For example, a strategy that takes
advantage of momentum should only be employed in trend-
ing markets and not in range-bound conditions. Even when
June 2019 • Technical Analysis of Stocks & Commodities • 45

There is no harm in closing the
trade at a profit when evidence
shows the trend has changed
against your position.
the trading conditions are right, it does not necessarily mean
you should spread your chips and bet on various positively
correlated markets at the same time. It is still essential to be
very selective and focus all your energy on one or at most a
few markets at a time.
Developing speculators can also limit the impact of recency
bias and overtrading by trading higher-timeframe setups,
for example, those that are formed on the daily instead of
the 15-minute timeframe. Although screen time is vital for
building experience, sitting in front of your charts, especially
if you have multiple monitors, can be quite distracting to say
the least. By reducing the number of screens and also screen
time (by physically being away from your monitors), and trad-
ing higher-timeframe levels, this may improve your ability
to remain patient, which is very important for development.
Granted, it may mean less opportunities in the short term,
but in the long run it could actually be very beneficial even if
you eventually go on to increase your trading frequency and
speculate on setups based on smaller timeframes.
Follow your trading plan
Discipline is a big issue for many newer and some seasoned
traders. Even when they have written a proper trading plan,
they keep finding themselves not really following it, especially
after a winning streak, as they now think they have “cracked
it”—why waste time reading boring stuff when you can get
excited about making money? Why keep recalling the hardship
you have been through by reading about your own mistakes
from the past? But what often happens is they give back their
winners and then some, and before long they are back to square
one. They then decide to get focused again, they make a new
plan, and they follow it for a while. But then they go through
the same cycle again at some later point.
Trying to discipline yourself in an environment that is
free from any control or governance such as the financial
markets is not easy. After all, one of the main reasons people
are attracted to trading is they hope to become financially
independent and be their own boss. But in reality, they will
realize that the market itself becomes your boss, and the work
you need to put in is a hundred times more than you thought
at the outset.
Repetition is key
For that reason, aspiring traders need to have a written and
visual plan, which should contain every aspect of their trad-
ing business, from rules on account management to notes on
46 • June 2019 • Technical Analysis of Stocks & Commodities
how to instill discipline—and not just in your trading. If you
are always late to work or find yourself making excuses to
go to the gym despite committing to do so, then those bad
habits—and lack of discipline—are likely to show up in your
trading results. Many psychologists would agree that in order
to build a habit, you need repetition. So whether it’s getting
to work early, going to gym regularly, or trading only your
plan, you need to force yourself to repeat these actions day
in and day out, possibly for several months, until it becomes
part of you.
Having a written and visual trading plan is one thing, but
reading and following it is another. You are only likely to follow
your rules when they become a habit. So work on making it
a habit by actively reminding yourself of the need to become
disciplined; otherwise, you might not cut it in trading.
Have realistic targets
Newer speculators, especially those with smaller account sizes,
tend to aim for the moon as they seek to quickly double their
account sizes in as few trades as possible. They do this despite
knowing full well that the markets don’t go up or down in a
straight line. Lo and behold, this way of trading soon turns
into frustration as the retracements continually knock their
trades out (which at one point may have been in significant
profit) at best for minimal gains and at worst at a full loss.
Meanwhile, account size continues to shrink as the trader
takes full losses on the losing trades and does not book profit
on profitable trades despite being up two, three, or even five
times the amount originally risked.
To avoid this mistake, profit targets need to be realistic. Even
if they are optimistic targets, there is no harm in closing the
trade at a profit when evidence shows the trend has changed
against your position. Why wait until you are stopped out?
Have an exit strategy
As experience grows, you will realize that perhaps the most
important part of trading is the exit strategy. Newer traders
tend to focus on optimizing their entry techniques, with a
view of entering as close to their invalidation level as pos-
sible in order to minimize risk. But they fail to keep in mind
that a profit or loss is only realized when you exit the trade.
They don’t pay as much attention to their exit strategies and
often act either too early by closing winners prematurely, or
too late. Instead of booking, say, a 5R profit, they get out at
breakeven when the market returns to their original entry
point where their adjusted stop-loss might now be resting.
The trader comforts himself by giving up a 5R winner by
thinking, “At least I didn’t lose anything on this trade since I
closed at breakeven.” No, you just lost 5R!
The fallacy of adjusting the stop-loss to breakeven
I discussed this problem in my last article, “The Importance
Of Being Sufficiently Capitalized,” and I’ll give a brief re-
cap here. Essentially, traders don’t like to see small losses.
Continued on page 62
 Algo Q&A
ALGORITHMIC TRADING
Have a question about system or algo trading? Kevin J. Davey has over 25 years of
system trading experience. Davey is a full-time trader, and he also teaches and con-
sults via his Strategy Factory online workshop (http://kjtradingsystems.com). He is the
author of several bestselling trading books, including Building Winning Algorithmic
Trading Systems and Introduction To Algo Trading. Send your questions or topic sug-
gestions to Kevin Davey at kdavey@kjtradingsystems.com. Selected questions will
appear in a future issue of S&C.
Kevin J. Davey

SUPERVISING YOUR check your automation from anywhere detailed plan and set of procedures handy
AUTOMATED TRADING in the world. for you or someone else to work through
I am considering algo trading, but am Most brokers provide multiple ways each link in the trading chain. Start with
worried about having problems with to check your accounts, so that might the exchange. If the exchange has an
orders, etc. Can you share some tips to be another path to monitoring your au- issue, do you have a way to offset your
put my mind at ease? tomation. If you run strategies on your open positions? One solution could be
Great question! CME, the major US home PC, you can get remote viewing to use ETFs to hedge a futures position,
futures exchange, has supervision rules software so you can log in even if you or vice versa.
for anyone running automated strategies. are running errands. Next, you need a backup broker, ide-
TradeStation, a major broker and soft- The point is, whenever you are running ally one you can connect your automated
ware provider in the algo world, always automated strategies, you need to know strategies to, but at the very least, a broker
advises clients that “automated trading what is going on at all times. you can use to offset open positions if
is not unattended trading.” you need to. Plus, for every broker you
Why? should have multiple ways of contacting
Simply put, running any automated them. Knowing their website address
algorithm has risks. So it is hard for me
Always be close by your helps little if the Internet goes down.
to put your mind at ease, since there are trading platform if it Finally, let’s say you are running
definitely risks with automation. Glitches is running automated algos on your home PC. Do you have a
happen—exchanges go down, Internet strategies. backup power supply, a backup Internet
connections break, broker interfaces fail, connection, and a backup PC, in case one
power supplies and computers fail—the or more of these fail? It may seem like
list of potential hiccups is long. Even A second tip to make your automated overkill to have backups and procedures
though turning on automation might be algorithms run smoothly is to have in place, but when it comes to automated
as simple as a few clicks, as shown in backups of everything. And when I say
Figure 1, keeping automation running everything, I mean everything! Have a Continued on page 62
smoothly is not
that easy.
The first tip,
therefore, is to al-
ways be close by
your trading plat-
form if it is run-
ning automated
strategies. You
need to be able to
supervise what is
going on. There
are many ways
to do this. For
example, if you
run your strate-
TRADESTATION

gies on a virtual
private server
(VPS), you can FIGURE 1: AUTOMATING YOUR TRADING STRATEGY. Just a few clicks is all it takes to automate a strategy. But that doesn’t mean you
easily log in and let it run without monitoring it.
June 2019 • Technical Analysis of Stocks & Commodities • 47
 For this month’s • 
Traders.com  S&C Magazine 
Traders’ Tips, the Traders’ Tips
focus is John Ehlers’
article in this issue, At Traders.com you can also right-click on any chart
“Fourier Series Mod- to open it in a new tab or window and view the chart
el Of The Market.” at a much larger size.
Here, we present the The Traders’ Tips section is provided to help
June 2019 Traders’ readers implement a selected technique from an
Tips code with possible implementations in various article in this issue or another recent issue. The
software. entries here are contributed by software develop-
The code for the following Traders’ Tips selec- ers or programmers for software that is capable of
tions is posted here: customization.

L2 = Cosine( 360 / ( Fundamental / 2 ) ) ;

F TRADESTATION: JUNE 2019 TRADERS’ TIPS CODE
In “Fourier Series Model Of The Market” in this issue, author
John Ehlers introduces a Fourier series indicator designed
to help traders identify cycles in the market. According to
the author, the approach based on five principles outlined by
J.M. Hurst in his 1970 book allows the determinization of a
security’s primary cycle period and gives a faithful picture of
market activity.
Here, we are providing TradeStation EasyLanguage code
for an indicator and strategy based on Ehlers’ concepts de-
scribed in the article. This code can be downloaded by visit-
ing our TradeStation and EasyLanguage support forum at
the link provided after the following code listing.
Indicator: Fourier Series Indicator
// TASC JUN 2019
// Fourier Series Analysis
// (C) 2005-2018 John F.
Ehlers
G2 = Cosine( Bandwidth * 360 / ( Fundamental / 2 ) ) ;
S2 = 1 / G2 - SquareRoot( 1 / ( G2 * G2 ) - 1 ) ;
L3 = Cosine( 360 / ( Fundamental / 3 ) ) ;
G3 = Cosine( Bandwidth * 360 / ( Fundamental / 3 ) ) ;
S3 = 1 / G3 - SquareRoot( 1 / ( G3 * G3 ) - 1 ) ;
end ;
//Fundamental Band-Pass
BP1 = .5 * ( 1 - S1) * ( Close - Close[2] )
+ L1 * ( 1 + S1 ) * BP1[1] - S1 * BP1[2] ;
if CurrentBar <= 3 then
BP1 = 0 ;
//Fundamental Quadrature
Q1 = ( Fundamental / 6.28 ) * ( BP1 - BP1[1] ) ;
if CurrentBar <= 4 then
Q1 = 0 ;
//Second Harmonic Band-Pass
BP2 = .5 * ( 1 - S2 ) * ( Close - Close[2] )

inputs:
Fundamental( 20 ) ;

variables:
Bandwidth(.1),
G1( 0 ), S1( 0 ), L1( 0 ),
BP1( 0 ), Q1( 0 ), P1( 0 ),
G2( 0 ), S2( 0 ), L2( 0 ),
BP2( 0 ), Q2( 0 ), P2( 0 ),
G3( 0 ), S3( 0 ), L3( 0 ),
BP3( 0 ), Q3( 0 ), P3( 0 ),
count( 0 ), Wave( 0 ),
ROC( 0 ) ;

//compute filter coefficients

once
once
begin
L1 = Cosine( 360 / Funda-
mental ) ;
G1 = Cosine( Bandwidth *
360 / Fundamental ) ;
S1 = 1 / G1 - SquareRoot(
FIGURE 1: TRADESTATION. This shows a daily chart of SPY with the Fourier series indicator and strategy applied.
1 / ( G1 * G1 ) - 1 ) ;

48 • June 2019 • Technical Analysis of Stocks & Commodities

 + L2 * ( 1 + S2 ) * BP2[1] - S2 * BP2[2] ; //compute filter coefficients once
if CurrentBar <= 3 then once
BP2 = 0 ; begin
L1 = Cosine( 360 / Fundamental ) ;
//Second Harmonic Quadrature G1 = Cosine( Bandwidth * 360 / Fundamental ) ;
Q2 = ( Fundamental / 6.28 ) * ( BP2 - BP2[1] ) ; S1 = 1 / G1 - SquareRoot( 1 / ( G1 * G1 ) - 1 ) ;
if CurrentBar <= 4 then L2 = Cosine( 360 / ( Fundamental / 2 ) ) ;
Q2 = 0 ; G2 = Cosine( Bandwidth * 360 / ( Fundamental / 2 ) ) ;
S2 = 1 / G2 - SquareRoot( 1 / ( G2 * G2 ) - 1 ) ;
//Third Harmonic Band-Pass L3 = Cosine( 360 / ( Fundamental / 3 ) ) ;
BP3 = .5 * ( 1 - S3 ) * ( Close - Close[2] ) G3 = Cosine( Bandwidth * 360 / ( Fundamental / 3 ) ) ;
+ L3 * ( 1 + S3 ) * BP3[1] - S3 * BP3[2] ; S3 = 1 / G3 - SquareRoot( 1 / ( G3 * G3 ) - 1 ) ;
if CurrentBar <= 3 then end ;
BP3 = 0 ;
//Fundamental Band-Pass
//Third Harmonic Quadrature BP1 = .5 * ( 1 - S1) * ( Close - Close[2] )
Q3 = ( Fundamental / 6.28 ) * ( BP3 - BP3[1] ) ; + L1 * ( 1 + S1 ) * BP1[1] - S1 * BP1[2] ;
if CurrentBar <= 4 then if CurrentBar <= 3 then
Q3 = 0 ; BP1 = 0 ;

//Sum power of each harmonic at //Fundamental Quadrature
//each bar over the Fundamental period Q1 = ( Fundamental / 6.28 ) * ( BP1 - BP1[1] ) ;
P1 = 0 ; if CurrentBar <= 4 then
P2 = 0 ; Q1 = 0 ;
P3 = 0 ;
For count = 0 to Fundamental - 1 //Second Harmonic Band-Pass
begin BP2 = .5 * ( 1 - S2 ) * ( Close - Close[2] )
P1 = P1 + BP1[count] * BP1[count] + L2 * ( 1 + S2 ) * BP2[1] - S2 * BP2[2] ;
+ Q1[count] * Q1[count] ; if CurrentBar <= 3 then
P2 = P2 + BP2[count] * BP2[count] BP2 = 0 ;
+ Q2[count] * Q2[count] ;
P3 = P3 + BP3[count] * BP3[count] //Second Harmonic Quadrature
+ Q3[count] * Q3[count] ; Q2 = ( Fundamental / 6.28 ) * ( BP2 - BP2[1] ) ;
end ; if CurrentBar <= 4 then
Q2 = 0 ;
//Add the three harmonics together
//using their relative amplitudes //Third Harmonic Band-Pass
If P1 <> 0 then BP3 = .5 * ( 1 - S3 ) * ( Close - Close[2] )
Wave = BP1 + SquareRoot( P2 / P1 ) * BP2 + L3 * ( 1 + S3 ) * BP3[1] - S3 * BP3[2] ;
+ SquareRoot( P3 / P1 ) * BP3 ; if CurrentBar <= 3 then
BP3 = 0 ;
Plot1( Wave );
Plot2( 0 ); //Third Harmonic Quadrature
Q3 = ( Fundamental / 6.28 ) * ( BP3 - BP3[1] ) ;
//Optional cyclic trading signal if CurrentBar <= 4 then
//Rate of change crosses zero at Q3 = 0 ;
//cyclic turning points
ROC = ( Fundamental / 12.57 ) * //Sum power of each harmonic at
( Wave - Wave[2] ) ; //each bar over the Fundamental period
Plot3( ROC ) ; P1 = 0 ;
P2 = 0 ;
P3 = 0 ;
Strategy: Fourier Series Strategy For count = 0 to Fundamental - 1
// TASC JUN 2019 begin
// Fourier Series Analysis P1 = P1 + BP1[count] * BP1[count]
// (C) 2005-2018 John F. Ehlers + Q1[count] * Q1[count] ;
P2 = P2 + BP2[count] * BP2[count]
inputs: + Q2[count] * Q2[count] ;
Fundamental( 20 ) ; P3 = P3 + BP3[count] * BP3[count]
+ Q3[count] * Q3[count] ;
variables: end ;
Bandwidth(.1),
G1( 0 ), S1( 0 ), L1( 0 ), BP1( 0 ), Q1( 0 ), P1( 0 ), //Add the three harmonics together
G2( 0 ), S2( 0 ), L2( 0 ), BP2( 0 ), Q2( 0 ), P2( 0 ), //using their relative amplitudes
G3( 0 ), S3( 0 ), L3( 0 ), BP3( 0 ), Q3( 0 ), P3( 0 ), If P1 <> 0 then
count( 0 ), Wave( 0 ), ROC( 0 ) ; Wave = BP1 + SquareRoot( P2 / P1 ) * BP2
+ SquareRoot( P3 / P1 ) * BP3 ;

June 2019 • Technical Analysis of Stocks & Commodities • 49

 //Rate of change crosses zero at Q3:= (x/6.28)*(BP3-Ref(BP3,-1));
//cyclic turning points {final calculations}
ROC = ( Fundamental / 12.57 ) * p1:= Sum((BP1*BP1) + (Q1*Q1), x);
( Wave - Wave[2] ) ; p2:= Sum((BP2*BP2) + (Q2*Q2), x);
p3:= Sum((BP3*BP3) + (Q3*Q3), x);
if ROC crosses over 0 then BP1 + Sqrt(p2/p1)*BP2 + Sqrt(p3/p1)*BP3;
Buy next bar at Market
else if ROC crosses under 0 then —William Golson
SellShort next bar at Market ; MetaStock Technical Support
www.metastock.com
To download the EasyLanguage code, please visit our
TradeStation and EasyLanguage support forum. The files
for this article can be found here: https://community.trades-
tation.com/Discussions/Topic.aspx?Topic_ID=156727. The
filename is “TASC_JUN2019.ZIP.” For more information
about EasyLanguage in general, please see http://www.trad-
estation.com/EL-FAQ. F THINKORSWIM: JUNE 2019 TRADERS’ TIPS CODE
A sample chart is shown in Figure 1. We have put together a study based on the article “Fourier
This article is for informational purposes. No type of trading
Series Model Of The Market” in this issue by John Ehlers. We
or investment recommendation, advice, or strategy is being made,
built the referenced study and strategy by using our proprietary
given, or in any manner provided by TradeStation Securities or
its affiliates. scripting language, thinkScript. To ease the loading process,
—Doug McCrary simply click on http://tos.mx/vDTSrd and then choose view
TradeStation Securities, Inc. thinkScript study and name it “fourierseriesindicator.” This can
www.TradeStation.com then be added to your chart from the edit study and strategies
menu within thinkorswim.
The study can be seen in Figure 2, set to display one-day
candles for the date range of October 20, 2017 through De-
cember 20, 2018. See John Ehlers’ article in this issue for
more details on how to interpret the study.
F METASTOCK: JUNE 2019 TRADERS’ TIPS CODE —thinkorswim
John Ehlers’ article in this issue, “Fourier Series Model Of The A division of TD Ameritrade, Inc.
Market,” explains how to reduce market action to a sinewave www.thinkorswim.com
using Fourier series analysis. The MetaStock formula for that
indicator is given here.

Fourier Series Analysis

x:= Input("fundemental cycle
length", 2, 100, 20);
bw:= 0.1; {bandwidth}
L1:= Cos(360/x);
G1:= Cos((bw*360)/x);
S1:= 1/G1 - Sqrt(1/(G1*G1) -1);
L2:= Cos( 360 / (x/2));
G2:= Cos((bw*360)/(x/2));
S2:= 1/G2 - Sqrt(1/(G2*G2) -1);
L3:= Cos( 360 / (x/3));
G3:= Cos((bw*360)/(x/3));
S3:= 1/G3 - Sqrt(1/(G3*G3) -1);
{fundemental band pass}
BP1:= .5*(1-S1)*(C-Ref(C,-2))
+ L1*(1+S1)*PREV -
S1*Ref(PREV,-1);
Q1:= (x/6.28)*(BP1-Ref(BP1,-1));
{second harmonic band pass}
BP2:= .5*(1-S2)*(C-Ref(C,-2))
+ L2*(1+S2)*PREV -
S2*Ref(PREV,-1);
Q2:= (x/6.28)*(BP2-Ref(BP2,-1));
{third harmonic band pass}
BP3:= .5*(1-S3)*(C-Ref(C,-2))
+ L3*(1+S3)*PREV - FIGURE 2: THINKORSWIM. This sample thinkorswim chart displays the study on one-day candles for the date range
S3*Ref(PREV,-1); 10/20/2017–12/20/2018.

50 • June 2019 • Technical Analysis of Stocks & Commodities

F ESIGNAL: JUNE 2019 TRADERS’
TIPS CODE
For this month’s Traders’ Tip, we’ve
provided the study Fourier_Series_In-
dicator.efs based on the article in this
issue by John Ehlers, “Fourier Series
Model Of The Market.” This study can
be used to describe the cycles present
in a market.
The study contains formula param-
eters that may be configured through
the edit chart window (right-click on
the chart and select “edit chart”). A
sample chart is shown in Figure 3.
To discuss this study or download
a complete copy of the formula code,
please visit the EFS library discus-
sion board forum under the forums
link from the support menu at www. FIGURE 3: ESIGNAL. Here is an example of the study plotted on a daily chart of SPY.
esignal.com or visit our EFS Knowl-
edgeBase at http://www.esignal.com/
support/kb/efs/. The eSignal formula script (EFS) is also
available for copying & pasting from the Stocks & Com-
modities website at Traders.com in the Traders’ Tips sec-
F QUANTACULA STUDIO: JUNE 2019 TRADERS’ TIPS CODE
tion.
The FourierSeries indicator presented by John Ehlers in his
—Eric Lippert
eSignal, an Interactive Data company article in this issue, “Fourier Series Model Of The Market,” is
800 779-6555, www.eSignal.com now available for Quantacula.com and Quantacula Studio from
our TASC Extension library. We developed a simple system to
exercise the indicator. Our trading model’s rules are:

• Buy next bar at market open when the FourierSeries(20)

has reached a new 200-bar low and then turns up. This
F WEALTH-LAB: JUNE 2019 TRADERS’ TIPS CODE is an example of a “self-tuning” model, a concept we’ve
The FourierSeries indicator presented by John Ehlers in his been working with recently at Quantacula. Rather than
article in this issue, “Fourier Series Model Of The Market,” establish an arbitrary oversold level, we use the histori-
represents market activity based on analysis principles es- cal data itself to look for an appropriate reversal level.
tablished by J.M. Hurst. It does so by
applying a set of band-pass filters.
In Wealth-Lab, install (or update)
the TASCIndicators library to its
most-recent version from our web-
site or by using the built-in Extension
Manager. Once you see the “Fourier
series” and “Fourier cyclic trading
signal” indicators listed under the
TASC Magazine Indicators group,
they’re ready for use in Wealth-Lab.
In Figure 4, you can see an exam-
ple of the indicators applied.
—Gene (Eugene) Geren,
Wealth-Lab team
MS123, LLC FIGURE 4: WEALTH-LAB. Here are the two Fourier-based indicators applied to a daily chart of SPY (data provided
www.wealth-lab.com by Yahoo).

June 2019 • Technical Analysis of Stocks & Commodities • 51

 Execute(BarHistory bars, int idx)
{
if (LastPosition == null)
{
//is FS at its historical low,
and turning up?
double lowFS =
fs.GetLowest(idx - 1, 200);
if (fs[idx - 1] == lowFS)
if (fs.TurnsUp(idx))
PlaceTrade(bars,
TransactionType.Buy, OrderType.
Market);
}
else
{
//sell at 2 bar high
PlaceTrade(bars, Trans-
actionType.Sell, OrderType.Limit,
bars.High.GetHighest(idx, 2));
FIGURE 5: QUANTACULA. This shows an example equity curve for the self-tuning FourierSeries model on Nasdaq }
100 stocks. }

• Sell at a limit price equal to the highest two-bar high. //declare private variables below
We’ve found that this exit works well to capture small private FourierSeries fs;
gains in markets that are due for an upside move, while }
reducing exposure. }

—Dion Kurczek, Quantacula LLC

We ran the model on the historical Nasdaq 100 stocks, info@quantacula.com
corrected for survivorship bias by accounting for the stocks www.quantacula.com
that came into and out of the index over time. We used
$100,000 starting capital, a position size of 25% of equity,
and a margin factor of 2 to 1. Over a 20-year backtest, the
model returned 7.84% APR while the QQQ benchmark re-
turned 3.49% APR. The model also had a win rate of nearly F NEUROSHELL TRADER: JUNE 2019 TRADERS’
70%. TIPS CODE
Here is the Quantacula C# code for the self-tuning Fouri- The Fourier market analysis indicator that John
erSeries model: Ehlers describes in his article in this issue, “Fourier Series
Model Of The Market,” can be easily implemented in Neuro-
using QuantaculaBacktest;
using QuantaculaCore;
using TASCExtensions;

namespace Quantacula
{
public class MyModel : UserMod-
elBase
{
//create indicators and other
objects here, executed prior to main
trading loop
public override void
Initialize(BarHistory bars)
{
fs = new FourierSeries(bars.
Close, 20);
PlotIndicator(fs);
StartIndex = 201;
}

//execute strategy rules here,

executed once for each bar in the
backtest history
public override void FIGURE 6: NEUROSHELL TRADER. This NeuroShell Trader chart shows the Fourier analysis on an SPY chart.

52 • June 2019 • Technical Analysis of Stocks & Commodities

 Once the file is down-
loaded, you can import the
indicator into NinjaTader
8 from within the control
center by selecting Tools
→ Import → NinjaScript
Add-On and then select-
ing the downloaded file for
NinjaTrader 8. To import
into NinjaTrader 7, from
within the control center
window, select the menu
File → Utilities → Import
NinjaScript and select the
downloaded file.
You can review the indi-
cator’s source code in Nin-
jaTrader 8 by selecting the
FIGURE 7: NINJATRADER. This shows the FourierSeriesAnalysis indicator displayed on a daily SPY chart from November 2017 menu New → NinjaScript
to December 2018. Editor → Indicators from
within the control center
Shell Trader using NeuroShell Trader’s ability to call external window and selecting the “Fourier series analysis” file. You
dynamic linked libraries. Dynamic linked libraries (DLLs) can review the indicator’s source code in NinjaTrader 7 by
can be written in C, C++, and Power Basic. selecting the menu Tools → Edit NinjaScript → Indicator
After moving the code given in Ehlers’ article to your from within the control center window and selecting the
preferred compiler and creating a DLL, you can insert the “Fourier series analysis” file.
resulting indicator as follows: NinjaScript uses compiled DLLs that run native, not in-
terpreted, which provides you with the highest performance
1. Select “New indicator …” from the insert menu. possible.
2. Choose the External Program & Library Calls A sample chart implementing the indicator is shown in
category. Figure 7.
3. Select the appropriate External DLL Call indicator. —Raymond Deux & Chris Lauber
4. Set up the parameters to match your DLL. NinjaTrader, LLC
5. Select the finished button. www.ninjatrader.com

Users of NeuroShell Trader can go to the Stocks & Com-

modities section of the NeuroShell Trader free technical
support website to download a copy of this or any previous
Traders’ Tips.
A sample chart is shown in Figure 6.
—Marge Sherald, Ward Systems Group, Inc.
301 662-7950, sales@wardsystems.com
www.neuroshell.com
F NINJATRADER: JUNE 2019 TRADERS’ TIPS CODE
The Fourier series analysis indicator, as discussed in the article
by John Ehlers in this issue, “Fourier Series Model Of The
Market,” is available for download at the following links for
NinjaTrader 8 and NinjaTrader 7:
NinjaTrader 8: ninjatrader.com/SC/June2019SCNT8.zip
NinjaTrader 7: ninjatrader.com/SC/June2019SCNT7.zip
F TRADE NAVIGATOR: JUNE 2019
TRADERS’ TIPS CODE
In the article “Fourier Series Model
Of The Market” in this issue, author John Ehlers describes a
Fourier series indicator. Users of Trade Navigator can down-
load this library in Trade Navigator.
To download this library, click on Trade Navigator’s tele-
phone button (or use the pull-down menu and then click “up-
date data”), select “download special file,” then click on the
start button. You will then be guided through an upgrade
of your Trade Navigator. If you are prompted to “reimport
libraries,” please do so. This will import the new indicator
into the software.
Once this update is complete, you can insert the Fourier
series indicator onto a chart by opening the charting drop-
down menu, selecting the add to chart command, then on the
indicators tab, finding the Fourier series indicator, selecting
it, then clicking on the add button. Repeat this procedure for

June 2019 • Technical Analysis of Stocks & Commodities • 53

 He then suggests that the
trader can apply rate-of-
change (ROC) logic to pin-
point the extreme high and
low turning points of this
Fourier-based oscillator and
thus the underlying turning
points of the price action.
This is a good tool to suggest
potential swing trading entry
and exit points.
The Fourier oscillator
(Figure 9) can also help dif-
ferentiate trending periods
from cycle-mode periods by
way of the oscillator swing
amplitudes.
This oscillator and the
FIGURE 8: TRADE NAVIGATOR. Here, the Fourier series indicator is displayed in the lower panel on a chart of SPY. ROC crossover signals can
be a great addition to any al-
ready-robust trading decision
additional indicators as well if you wish. system but should not be used as a standalone system.
Users may contact our technical support staff by phone I got a little curious about this F-ROC signaling technique
or by live chat if any assistance is needed in importing the and Figures 10 and 11 show the simple statistics this spread-
library. sheet collects.
A chart displaying the indicator is shown in Figure 8. The formulas in columns just to the right of the charts,
—Genesis Financial Technologies
Tech support 719 884-0245
which are shown in Figure 10, keep track of the number of
www.TradeNavigator.com bars until the next occurrence of the indicated F-ROC cross-
over types. Of particular interest, the half wave would be
the duration of a long or short swing trade when based on
F-ROC crossovers.
Figure 11 provides a couple of interesting bits. When us-
F MICROSOFT EXCEL: JUNE 2019 TRADERS’ TIPS CODE ing “20” as the fundamental cycle length for the Fourier con-
In his article in this issue, “Fourier Series Model Of The struct, the F-ROC detected full cycle lengths, either up to up,
Market,” author John Ehlers presents a very interesting or down to down, clustered around seven bars.
Fourier-based oscillator construct that maps very nicely to For swing traders, the half wave (long or short position
cyclic price swings while filtering out much of the higher- duration) clusters around four bars.
frequency cycle noise. Ehlers suggests 20 as a fundamental cycle length for these

FIGURE 9: EXCEL, FOURIER OSCILLATOR

54 • June 2019 • Technical Analysis of Stocks & Commodities

calculations, as that is roughly the number of trading days
in a month.
Just for grins, I thought to try 60 as an approximation of
the number of trading days in a quarter.
One interesting result, seen in Figure 12, is that with the
fundamental cycle length set to 60, the full cycle numbers
cluster around 20 bars, similar to Ehlers’ observation for the
trading length of a month.
The spreadsheet file for this Traders’ Tip can be down-
loaded from Traders.com in the Traders’ Tips area. To suc-
cessfully download it, follow these steps:
• Right-click on the Excel file link, then
• Select “save as” or “save target as” to place a copy of the
spreadsheet file on your hard drive.
—Ron McAllister
Excel and VBA programmer
rpmac_xltt@sprynet.com

F AMIBROKER: JUNE 2019 TRADERS’ TIPS CODE

In his article in this issue, “Fourier Series Model Of The Mar-
ket,” John Ehlers presents a new Fourier series indicator that
describes cyclic market activity to help swing traders develop
trading strategy rules. Ready-to-use code is provided below.

// Fourier Series Analysis

Fundamental = 20;
Bandwidth = 0.1;
TWOPI = 2 * 3.1415926;

//compute filter coefficients

FIGURE 10: EXCEL, BAR COUNT TO NEXT EVENT
L1 = cos( TWOPI / Fundamental);
G1 = cos( Bandwidth*TWOPI / Fundamental);
S1 = 1 / G1 - sqrt(1 / (G1*G1) - 1);
L2 = cos(TWOPI / (Fundamental / 2));
G2 = cos(Bandwidth*TWOPI / (Fundamental / 2));
S2 = 1 / G2 - sqrt(1 / (G2*G2) - 1);
L3 = cos(TWOPI / (Fundamental / 3));
G3 = cos(Bandwidth*TWOPI / (Fundamental / 3));
S3 = 1 / G3 - sqrt(1 / (G3*G3) - 1);

// Fundamental Band-Pass
// 2nd order IIR
// IIR( array, b0,
// a1, b1,
// a2, b2 )
// aX - output (feedback) at X bar back
// bX - input at X bar back

BP1 = IIR( Close, 0.5*( 1 - S1 ),

L1*(1 + S1), 0,
FIGURE 11: EXCEL, SIMPLE EVENT-TYPE STATISTICS -S1, - 0.5*( 1 - S1 ) );

// Fundamental Quadrature
Q1 = (Fundamental / TWOPI)*(BP1 - Ref(BP1, -1 ));

//Second Harmonic Band-Pass

BP2 = IIR( Close, 0.5*(1 - S2),
L2*(1 + S2), 0,
-S2, - 0.5*(1 - S2) );

//Second Harmonic Quadrature

Q2 = (Fundamental / TWOPI)*(BP2 - Ref( BP2, -1 ));

// Third Harmonic Band-Pass

BP3 = IIR( Close, 0.5*(1 - S3),
L3*(1 + S3), 0,
FIGURE 12: EXCEL, STATISTICS FOR A FUNDAMENTAL CYCLE LENGTH OF 60 -S3, - 0.5*(1 - S3) );

June 2019 • Technical Analysis of Stocks & Commodities • 55

 // Add the three harmonics together using their
relative amplitudes
Wave = BP1 + sqrt(P2 / P1)*BP2 + sqrt(P3 /
P1)*BP3;

Plot(Wave, "Wave", colorRed );

// Optional cyclic trading signal

// Rate of change crosses zero at cyclic turning
points
rocc = (Fundamental / 12.57)*(Wave - Ref(Wave,
-2));
// Plot(rocc, "Rate of change crosses zero",
colorBlue);

A sample chart is shown in Figure 13.

—Tomasz Janeczko, AmiBroker.com
www.amibroker.com

FIGURE 13: AMIBROKER. This daily chart of SPY with the Fourier series indicator (wave) in the
lower pane replicates the chart from the referenced article in this issue. F TRADERSSTUDIO: JUNE 2019
TRADERS’ TIPS CODE
The importable TradersStudio files based on John Ehlers’
//Third Harmonic Quadrature article in this issue, “Fourier Series Model of The Market,”
Q3 = (Fundamental / TWOPI)*(BP3 - Ref(BP3, -1) ); can be obtained on request via email to info@TradersEdge­
Systems.com. The code is also available at Traders.com in the
// Sum power of each harmonic at each bar over the Fun- Traders’ Tips area.
damental period
P1 = 0; P2 = 0; P3 = 0;
The author did not provide complete code for a trading
for( count = 0; count < Fundamental; count++ ) system. The code I am supplying may not be what the author
{ intended. It only seems to work when traded without com-
b = Ref( BP1, -count ); q = Ref( Q1, -count ); missions or slippage so additional work is needed to convert
P1 += b * b + q * q; this to a real-world trading system.
b = Ref( BP2, -count ); q = Ref( Q2, -count ); —Richard Denning
P2 += b * b + q * q;
info@TradersEdgeSystems.com
b = Ref( BP3, -count ); q = Ref( Q3, -count );
P3 += b * b + q * q; for AIQ Systems
}

INTERVIEW lines because there’s a lot in those charts Bollinger Bands, McGraw-Hill.
Continued from page 39 you might miss otherwise. • bollingerbands.com
• bollingerbands.us
And if you’re going to check in with Interesting stuff. Thanks for speaking
the market timing chart pack, please be with us, John.
sure to download the guidelines, near
the bottom of our main page website. I FURTHER READING
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accuracy, last-minute changes may result in omissions or errors.

June 2019 • Technical Analysis of Stocks & Commodities • 57

 FUTURES LIQUIDITY

T
rading liquidity is often over-
looked as a key technical
measurement in the analysis
and selection of commodity
futures. The following explains how to
read the futures liquidity chart pub-
lished by Technical Analysis of Stocks
& Commodities every month.
Commodity futures
The futures liquidity chart shown be-
low is intended to rank publicly traded
futures contracts in order of liquidity.
Relative contract liquidity is indicated
by the number of dots on the right-hand
side of the chart.
This liquidity ranking is produced by
multiplying contract point value times
the maximum conceivable price motion
(based on the past three years’ historical
data) times the contract’s open interest
times a factor (usually 1 to 4) for low or
very high volumes. The greatest number
of dots indicates the greatest activity;
futures with one or no dots show little
activity and are therefore less desirable
for speculators.
Courtesy of CBOT
All futures listed are weighted equally
under “contracts to trade for equal dol-
lar profit.” This is done by multiplying
contract value times the maximum pos-
sible change in price observed in the last
three-year period. Thus, all numbers in
this column have an equal dollar value.
Columns indicating percent margin
and effective percent margin provide
a helpful comparison for traders who
wish to place their margin money ef-
ficiently. The effective percent margin
is determined by dividing the margin
value ($) by the three-year price range of
contract dollar value, and then multiply-
ing by one hundred.
Stocks
Trading liquidity has a significant ef-
fect on the change in price of a secu-
rity. Theoretically, trading activity can
serve as a proxy for trading liquidity
and equals the total volume for a given
period expressed as a percentage of the
total number of shares outstanding. This
value can be thought of as the turnover
rate of a firm’s shares outstanding.

Trading Liquidity: Futures

Contracts to
Effective
Commodity Futures Exchange % Margin Trade for Equal Relative Contract Liquidity
% Margin
Dollar Profit
S&P 500 E-Mini (Jun ’19) CME 4.7 14.5 2 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>>>>
10-Year T-Note (Jun ’19) CBOT 1 11.4 8 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
5-Year T-Note (Jun ’19) CBOT 0.7 10.1 11 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
Ultra T-Bond (Jun ’19) CBOT 2.5 13.1 3 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
2-Year T-Note (Jun ’19) CBOT 0.2 7.4 12 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
T-Bond (Jun ’19) CBOT 1.9 9.1 3 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
Russell 2000 E-Mini (Jun ’19) CME 2.5 7.6 2 •••••••••••••••••••••••••••••••••••••••••••
Nasdaq 100 E-Mini (Jun ’19) CME 5.3 11.4 1 ••••••••••••••••••••••••••••••••••••••••
Crude Oil WTI (Jun ’19) NYMEX 5.6 13.8 3 •••••••••••••••••••••••••••••••••••••••
Soybean Meal (Jul ’19) CBOT 0.7 1.7 1 ••••••••••••••••••••••••••••
Soybean (Jul ’19) CBOT 2.2 5.8 3 ••••••••••••••••••••••••••
Ultra 10-Year T-Note (Jun ’19) CBOT 1.2 9.2 5 •••••••••••••••••••••••••
Euro FX (Jun ’19) CME 1.8 14.3 5 ••••••••••••••••••••
Eurodollar (Dec ’19) CME 0.1 4.1 18 •••••••••••••••••••
Natural Gas (Jun ’19) NYMEX 7.3 7.5 4 •••••••••••••••
Gold (Jun ’19) COMEX 2.9 25.2 6 ••••••••••••
Gasoline RBOB (Jun ’19) NYMEX 5.3 13.2 2 •••••••••
Sugar #11 (Jul ’19) ICE/US 7.2 8.5 7 •••••••••
Corn (Jul ’19) CBOT 4.3 18.2 20 ••••••••
Dow 30 E-Mini (Jun ’19) CBOT 4.9 13.4 2 ••••••••
Coffee (Jul ’19) ICE/US 8.5 9.6 3 •••••••
ULSD NY Harbor (Jun ’19) NYMEX 4.3 10.5 2 •••••••
Japanese Yen (Jun ’19) CME 1.8 13.8 6 ••••••
British Pound (Jun ’19) CME 3.3 20.8 7 ••••
S&P Midcap E-Mini (Jun ’19) CME 4.7 16.4 1 ••••
Silver (May ’19) COMEX 4.9 11.5 3 ••••
Wheat (Jul ’19) CBOT 6.7 17.1 10 ••••
30-Day Fed Funds (May ’19) CBOT 0 2.1 10 •••
Australian Dollar (Jun ’19) CME 2.1 14.4 8 •••
Hard Red Wheat (Jul ’19) KCBT 7.1 13.6 8 •••
Live Cattle (Jun ’19) CME 3.4 15.4 8 •••
Canadian Dollar (Jun ’19) CME 1.7 15 10 •• CBOT Chicago Board of Trade, Division of CME
Crude Oil Brent (F) (Jun ’19) NYMEX 5.6 12.6 3 •• CFE CBOE Futures Exchange
High Grade Copper (May ’19) COMEX 3.6 12 4 •• CME Chicago Mercantile Exchange
Lean Hogs (Jun ’19) CME 6 10.6 4 •• COMEX Commodity Exchange, Inc. CME Group
Mexican Peso (Jun ’19) CME 4.2 29.8 23 •• ICE-EU Intercontinental Exchange-Futures - Europe
Palladium (Jun ’19) NYMEX 8.6 13.9 1 •• ICE-US Intercontinental Exchange-Futures - US
Swiss Franc (Jun ’19) CME 2.3 21.7 6 •• KCBT Kansas City Board of Trade
Cocoa (Jul ’19) ICE/US 9.1 22.1 9 • MGEX Minneapolis Grain Exchange
Cotton #2 (Jul ’19) ICE/US 7.5 31.4 9 • NYMEX New York Mercantile Exchange
Feeder Cattle (Aug ’19) CME 3.9 15.1 4 •
1906
New Zealand Dollar (Jun ’19) CME 2.3 17.1 9 •
Trading Liquidity: Futures is a reference chart for speculators. It compares markets “Relative Contract Liquidity” places commodities in descending order according to
according to their per-contract potential for profit and how easily contracts can be bought how easily all of their contracts can be traded. Commodities at the top of the list are easi-
or sold (i.e., trading liquidity). Each is a proportional measure and is meaningful only est to buy and sell; commodities at the bottom of the list are the most difficult. “Relative
when compared to others in the same column. Contract Liquidity” is the number of contracts to trade times total open interest times a
The number in the “Contracts to Trade for Equal Dollar Profit” column shows how volume factor, which is the greater of:
many contracts of one commodity must be traded to obtain the same potential return In volume
as another commodity. Contracts to Trade = (Tick $ value) x (3-year Maximum Price 1 or exp –2
In 5000
Excursion).

58 • June 2019 • Technical Analysis of Stocks & Commodities

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The information in Traders’ Resource is the most accurate at the time of posting and is subject to change. Because the vendors posting to Traders’ Resource are responsible for their own listing, Technical Analysis, Inc. declines any and all liability
for any representations made by the businesses and individuals listed. Nor can Technical Analysis, Inc. endorse any business or individual listed on Traders’ Resource. Technical Analysis, Inc. makes no warranties, express or implied, as to the
accuracy and reliability of claims herein. You agree to release Technical Analysis, Inc., together with its respective employees, agents, officers, directors and shareholders, from any and all liability and obligations whatsoever in connection with or
arising from your use of Traders’ Resource. If at any time you are not happy with the information posted to Traders’ Resource or object to any material within Traders’ Resource, your sole remedy is to cease using it. This list is updated frequently.
If you are aware of a business that should be listed, please email us at Editor@Traders.com.

June 2019 • Technical Analysis of Stocks & Commodities • 59

 Trading Perspectives

SOME PERSPECTIVES ON THE EQUITIES WORLD

Rob Friesen is a professional trader and president & COO of Bright Trading (www.
stocktrading.com), a proprietary trading firm hosting independent trader/members,
an online trading school, and utilizing the StockOdds database (www.stockodds.
net). This column shares his thoughts and outlooks on trading, locating opportunity,
probabilistic outcome, and maintaining perspective throughout industry changes. He
can be reached at robfriesen@brighttrading.net or via www.stocktrading.com.
Rob Friesen

COGNITIVE BIASES THAT INFLUENCE
YOUR TRADING OUTCOMES
The door to the trading world opens and
we step into the unknown, probability-
blind.
If that isn’t enough, we have monsters
that lurk in the shadows and influence
our judgment, decisions, and ability to
analyze our resulting actions correctly.
These monsters are our cognitive
biases that affect our mind, having us
think, evaluate, or act in ways that aren’t
rational, sound, or probability-based.
How many average investors or active
traders are aware of these psychological
drivers, and how many fall victim to the
ones that have the greatest impact on
their financial health?
This month, I’ll discuss these influ-
ences to help you become aware of them
and to encourage you to overcome the
challenges they present. I believe that if
you explore these influences deeply and
create checks and balances for them, this
will increase your odds of success. Here
is a list of some possible influences and
cognitive biases to explore.
Confirmation bias: Traders tend to see
what they want to see. They interpret
information and even remember things
in keeping with preconceptions. They
tend to look for confirmations for their
ideas or beliefs. This could even apply to
a profitable trade. In the trader’s mind,
a profitable outcome might mean that
everything was done correctly, whereas
in actuality you may have done the wrong
thing prior to that outcome.
Disposition effect: Traders take profits
and hold losers. They sell stocks that
have risen in value and keep those that
have declined. You can go broke taking
small gains.
60 • June 2019 • Technical Analysis of Stocks & Commodities
Gambler’s fallacy: This one is fre-
quently discussed in gaming theory.
Traders can tend to have the false
belief that if something happens more
frequently than normal during a given
period, it will happen less frequently in
the future, or the opposite of that. For a
stock-related example: If it has streaked
too much it must revert, or if it has been
stationary for too long it must break out.
If it is overbought, it must retrace; if it is
oversold it will have to rally.
Hindsight bias: In the past it’s been said
on the trading floor and you now hear
it often in online trading rooms, or you
might hear it from your friend, trading
buddy, or even the talking heads: “I
A trader desperately
wants his strategy
development to lead to
profitability.
knew it!” It is the tendency to see past
events as being predictable at the time
they happened.
Mere exposure effect: Traders often have
a grudge against a stock that has bitten
them. Like the “once bitten, twice shy”
cliché or “familiarity breeds contempt.”
The best practice is to refrain from emo-
tional attachment or emotional rejection
related to market instruments.
Some of the best opportunities present
themselves after a disaster. If only the
trader could maintain a rational approach
versus having an emotional attachment,
he may be able to carpe diem.
Neglect of probability: Even those trad-
ers with an understanding of probability
and statistics can completely disregard
probabilities when making decisions
under uncertainty. But many traders
suffer from probability illiteracy.
Not invented here: I have witnessed
many traders refusing to consider, look
at, or entertain anything that they them-
selves haven’t created. Ownership can be
important, but stubbornness pertaining
to avoiding any new products, research,
or knowledge outside of their comfort
zone can be detrimental.
Optimism bias: This is the tendency to
overestimate favorable outcomes. I see a
direct correlation between this tendency
and the misleading risk-to-reward ratio,
something I have discussed in a previous
column in this magazine. The reward is
conveniently overweighted in the trader’s
mind, while the risk is underweighted.
Ostrich effect: Traders won’t look at
their trading account net value when
they know full well things aren’t go-
ing well. They just don’t want to look
at that baseline number. They hope it
will magically resolve itself. Traders
must be attentive to all aspects of their
trading business, just like being on top
of the bookkeeping and margins of a
traditional business.
Regressive bias: This is where high
values and high likelihood of an outcome
are overestimated, whereas low value and
lower likelihoods are underestimated.
Selection bias: Part of the reason that
paper-trading lacks credibility is that it
can be like kicking the tires on a car at
the car sales lot. Until you own the car,
you may have never noticed a car like
 Trading Perspectives
that one on the road before. But now that
you selected it and invested in it, you see
similar ones everywhere.
When you take a live trade on an
opening gap, you can now really “see”
how frequently it gaps, or how volatile it
really is, or how wide the bid–ask spread
is. This bias can have a positive side to
it, in that ownership keeps you informed,
observant, and realistic.
Sunk-cost fallacy: This is when traders
feel that they are already so financially
committed to a position, especially if
they ignored the original entry rules,
position-size rules, or stop-loss rules, that
they must stay committed. This fallacy
affects their ability to make rational deci-
sions moving forward and blocks recall
of their original trading plan.
Framing effect: I have recommended to
traders who love their candlestick charts
to change the color scheme of the candles
to: up candles = red, and down candles =
green. This is the opposite of the default
setting. I have also suggested other color
schemes the trader can try with the pur-
pose of evaluating the emotional impact
the color scheme is having on them.
The emotional impact of colors is real
for most market participants. Traders
can make different decisions from the
same information depending on how
that information is “framed.”
Bandwagon effect: This is becoming
more apparent all the time in our social
media–driven, “information singular-
ity” landscape. People believe what
they want to believe and either look for
or are algorithmically fed reinforcing
information, and soon they are down a
rabbit hole or on a flight to Mars. This
is herd behavior, hive sentience—and we
see its wave action regularly.
I would bet on more tulip bulb–type
bubbles yet to come. The fear of missed
gains hasn’t yet been put to pasture.
Congruence bias: I recommend that
traders form or borrow a hypothesis
that they can then test for themselves
directly. However, the temptation is to
test this hypothesis exclusively rather
than to explore and test for possible
alternative hypotheses. This can tie into
the confirmation bias.
Conjunction fallacy: The risk in
backtesting is with curve-fitting data
to substantiate your hypothesis, pre-
conceptions, and beliefs. Traders often
complicate testing with too many vari-
ables, believing that specific conditions
have greater probability than simple/
general ones.
Denomination effect: People will
gladly part with pocket change while
being reluctant to spend a $20 bill. The
larger the denomination, the harder it is
to want to break it. I have witnessed a
change in traders’ ability to make money
with the advent of the average trade size
dropping on the exchanges. Imagine you
were placing a 5,000-share trade on a
$50 stock. You might be more attentive
to the expected value and timing of the
The fear of missed
gains hasn’t yet been
put to pasture.
trade than if you did 500 shares of that
same stock. I am not suggesting you
increase your position size as liquidity
changes. What I’m saying is to make the
commitment that all your trades will
be probability-based and will have the
best ingredients for success, regardless
of size.
Focusing effect: When I am mentoring
traders, this influence has been evident.
When a new concept is presented, the
tendency is to forget to hold in context or
balance previously learned information.
As the cliché goes, “On the one hand…
and on the other hand….” Traders need
to learn to balance the concepts, which
is a component of the school of hard
knocks, time in the seat, IQ, and EQ.
New information is important, but the
trader must not be myopic, forgetting the
past information.
Experimenter’s bias: A trader desper-
ately wants his strategy development to
lead to profitability; after all, he needs
June 2019
to pay the bills. He may also feel a sense
of ownership over the time and effort
put into research and harvesting the
data. This expectation leads to the bias
of clinging to any signs of it working,
while discarding or underweighting any
results that may disappoint.
Illusion of validity: I have observed
this tendency to assign validity to a
pair relationship just because it shows
correlation and co-integration metrics.
That may be the case, but what can be
overlooked is meaningful information
such as underlying fundamentals that
point to uncorrelated risks between the
two companies. Regardless of the elastic-
ity of the quantitative measuring sticks, a
rare event could happen at any time.
Law of the instrument: Traders who
discover an edge often learn through
hardships and become disciplined and
stay in their lane. They become extremely
successful and ultimately become one-
trick ponies. Then they become over-
reliant on their method, strategy, or
tools, ignoring all new information and
approaches. Unfortunately, one day, if
they aren’t adapting and looking for new
cheese, they face obsolescence.
Summary
There are many other cognitive biases,
tendencies, illusions, fallacies, effects,
and urban legends we could look at
through the trader’s lens. The key is to
be aware of and do everything in your
power to reduce these. I consistently
recommend that traders make a two-
column list on two separate pages. In
the first column of the first page, write
down all your strengths. In the second
column, determine how those strengths
will assist you in your trading career. The
second page is for all your weaknesses.
In the column next to those, write down
how those will undermine your trading
and contribute to losses. Then consider
how to increase your strengths and put
checks and balances in place to reduce
or eliminate the impact of your weak-
nesses.
It’s a simple but effective exercise.
• Technical Analysis of Stocks & Commodities • 61
 PRODUCT REVIEW:
THE 3S CODE
Continued from page 41
target levels fall within his or her personal
risk-to-reward parameters.
The scanner as well as video and writ-
ten bonus materials included with the
program create added value to an already
worthwhile trading product.
Barbara Star, PhD, is a Contributing
Writer to Technical Analysis of Stocks
& Commodities magazine. Currently,
she trades part-time and provides in-
dividual instruction and consultation
to those interested in the technical
analysis of the financial markets. She
lives in Woodland Hills, CA and can be
reached at 818 224-4070 or by email at
star4070@aol.com.
‡3S (Seasonal Swing Trader); ‡thinkorswim
(TD Ameritrade)
‡See Editorial Resource Index

RAZAQZADA/TRADING MISTAKES Fawad Razaqzada is an economist and market analyst who

Continued from page 46
Because of this, they move their stop-loss to breakeven when
the trade sees some profit. But this could work against them
because the stop-loss could get triggered at a breakeven point.
Really, you should be entering your position at that point. I
provided an example in the article and if you haven’t read it
yet, I encourage you to read it. Chances are you have found
yourself in such a situation before.
KEY TAKEAWAY POINTS
It is clear that most of the mistakes that the novice trader
makes can be avoided by simply having a plan, following the
plan, and remaining patient. Granted, you still need to have
a proven edge that has a positive expectancy based on your
backtests. But without considering at least some of the above
suggestions, even a proven strategy might not be enough to
ensure success in trading.
has been involved in the financial markets for almost 10 years.
He has worked for several leading brokerages as a market
analyst in London. Specializing in forex, commodities, and
stock indexes, Razaqzada has expertise in reading price action
on the charts. He uses his knowledge of economics together
with fundamental analysis to forecast short-term price fluc-
tuations. He has also been trading his personal account for
many years. Follow him on Twitter at @Trader_F_R.
FURTHER READING
Razaqzada, Fawad [2019]. “The Importance Of Being Suf-
ficiently Capitalized,” Technical Analysis of StockS &
commoditieS, Volume 37: May.

Algo Q&A
DAVEY/ALGO Q&A
Continued from page 47
algos, an ounce of prevention is worth a
pound of cure.
Once you have good oversight and
redundant backup features in place, you
can start incorporating the third tip—
dealing with anomalies.
I have been trading automated algos
for many years now (long before they
were called algos!), and every once in a
while I still encounter brand-new situa-
tions and problems. There are so many
62 • June 2019 • Technical Analysis of Stocks & Commodities
glitches that can and do occur that I
keep an ongoing log of these problems
and solutions.
Typically, if an algo error occurs once,
I’ll only quickly investigate. But if the
same issue crops up multiple times, it
deserves a detailed investigation. Some-
times the strategy coding is to blame (I
once had a strategy that kept firing off
orders, with immediate cancellations,
until I fixed the code). Other times, data
corrections and momentary Internet
drops (especially with Wi-Fi) lead to
botched or missing orders.
Unfortunately, unless you are work-
ing under the tutelage of an experienced
trader, you will have to experience these
glitches numerous times before you learn
to fix them. There is no publicly available
book of automated algo trading glitches.
Sometimes I wish there were!
Even though it sounds scary, and I
doubt I put your mind at ease, trading
automated algorithms in a safe manner
is definitely possible. If you venture into
algo trading, avoid the mindset of “set
it and forget it” and you will be on the
right path.
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