insights
too beautiful to be true, it probably is. If they promise you
quick wealth, quick is how you need to get out.
New Quality Metrics
If returns are not the way to measure achievement, then
what is? Well, in true science we have to keep track of the
misses, not just the hits! Likewise a good trader is to be
spot by looking at his losses.
Take Figure 2. A picture we frequently (re)use
to explain that profits come from balancing the
average size of profits and losses over their relative
frequency. Since we have far more control over the
average size of our profits and losses than we have
over their frequency, we should focus on minimising
losses and maximising gains. From this it follows
that a good portfolio or trader must be recognisable
from an overall historical picture showing (lots of)
small losses and (probably fewer) big winners. In
contrast though, with each momentarily look at such
a portfolio, chances are that you will find just the
opposite. For there will be few small losses and almost
only (big) winners. Because losses need to be weeded
out quickly. So metrics might include the average size
of losers against the average size of winners but also
the average holding period of losers against that of
winners. Also having a rising equity curve with small
drawdowns and more losers than winners is a strong
indication of a good trader.
One remarkable psychological study even showed
how long term performance of traders was, to a certain
extent, inversely correlated with how frequently
performance was measured (by return). So the more
traders look at their returns, the less they seem to have
them. But we cannot deduce any causality from this
without further study. It could just as well be that bad
traders look at their returns more. But even then it is a
correlative indicator, nevertheless.
In Conclusion
Returns, in the end, will be the result of being a consistent
trader focusing on self-reflection while keeping a
constant eye on risk management and position sizing.
So as bad as metric returns are on short time scales,
as inevitable they will be in the long run as the ultimate
proof of being able to do the right things instead of
doing things right. «
23
 INSIgHTS www.tradersonline-mag.com 07.2014

Trading Seasonalities
Part 12: Next and randgold resources Long

In the previous parts of this series, mostly commodities, currencies, and US stocks were presented as trading ideas. In
Part 12, we will be showing two British shares that are among the FTSE 100 that from a certain point in July, are both long
candidates and can also be traded via leveraged instruments such as CFDs or leverage certificates.

F1) Trading Idea: Next Long » Trading Idea: Next

The first idea is the Next plc stock
which in the last twelve years,
beginning on 2nd July, has gone up
in 92 per cent of cases. The holding
period is 124 days with an exit being
advisable on 3rd November. Next
PLC is a British retailer, operating
more than 500 stores in Britain and
Ireland. In addition to the various
stores, an extensive catalogue
and internet shop are available
to customers. Internationally, the
group boasts about 200 stores and,
of course, its own website. The
product range includes articles from
The British retailer shows an upward triangle. A breakout above 67 pounds opens up a potential that may the fields of women’s, men’s and
reach up to 90 pounds. The ideal entry period is 2nd July with a holding period until 3rd November.
Source: www.lp-software.de
children’s clothing, lingerie, home
furnishings, fashion and home

24

accessories, and shoes. Profits have
been on the rise for five years and
shareholders can look forward to
a dividend yield of more than three
per cent. On average, there has been
an increase of more than ten per
cent during the period mentioned.
At its peak, the stock managed to
rise by 19.51 per cent during the
holding period with the average loss
amounting to 12.48 per cent.
Figure 1 shows the intact upward
trend. In the chart, you can see a
resistance at 67 pounds which, if
exceeded, would be an entry point for
trend followers. The stock is near its
all-time high. As long as the medium
term uptrend does not go below 54
pounds, the stock is a buy solely for
reasons of a good return. The shares
may also be traded inexpensively in
Stuttgart. However, attention should
be paid here to the tight market. By the end of the holding
period, the stock might rise to the 90-pound range after a
breakout. That is where the upper parallel trend limitation
runs at the time of exit.
Trading Idea: Randgold Resources
The second idea indicates the seasonally ideal entry
point at the end of July and refers to the mining stock of
Randgold Resources Limited. As the name suggests, the
company has specialised in the mining of gold. On 23rd
T1) Seasonal Trades of the Month
Instrument Next
Direction bullish
Entry 02.07.2014
Exit 03.11.2014
Hit Rate 92%
Backtest History 12
Average Profit 10.42%
Maximum Profit 19.51%
Average Loss -12.48%
Maximum Loss -12.48%
Holding Period 124
The table contains the key parameters of the two trades presented.
Source: www.logicalline.com
insights
F2) Trading Idea: Randgold Resources Long
As of 23rd July, Randgold Resources is a buy with a holding period until 28th November. The high correlation
between the stock and gold must be paid attention to here. An upward breakout from the wedge would be
ideal.
Source: www.lp-software.de
July, a long position can be built here whose holding period
lasts until 28th November. Seasonally, this also marks the
simultaneous beginning of a seasonally positive time for
the troy ounce of gold itself. The market plunge of the
yellow metal, which began in late May, could consequently
come to an end at this time. Due to the high correlation
between the mining stock and gold, there is, therefore,
also the probability of a trend reversal upwards.
In the last ten years there has been an average increase
of 9.59 per cent during the above-mentioned period in
70 per cent of cases. At its peak, investors were able to
earn as much as 45 per cent. However, it should be noted
that downward pressure will massively increase, if gold
continues to fall. On average, the potential loss here is
Randgold nearly twelve per cent, but may also be significantly higher
Resources
(Table 1). This stock may also be bought at low cost via
bullish
the Stuttgart Stock Exchange. Figure 2 shows a bullish
23.07.2014
downward wedge, where the ideal time for a breakout in
28.11.2014
the entry period is recognisable. Stocks will usually leave
70%
such formations upwards, but there are also exceptions. «
10
9.59%
45.97% Update
-12.08%
-29.00%
On 2nd and 23rd July, an update is available on
www.tradersonline-mag.com, where the stocks are re-
128
examined based on the current price development. In
addition, specific price targets are developed there.
25
 insights – news www.tradersonline-mag.com 07.2014

NYSE Investor
Credit and the Market

The market might be ripe for a strong

leg down. The chart shows NYSE data
that includes free cash accounts and
credit balances in margin accounts.
Essentially, the Credit Balance is
calculated as the sum of Free Credit
Cash Accounts and Credit Balances
in Margin Accounts minus Margin
Debt. In addition, the chart illustrates
an overlay of the S&P 500. Compare
for yourself, but for us, it looks pretty
extended…
Sources: www.dshort.com,
www.AdvisorPerspectives.com

News from BATS

In the U.S., BATS reported 20.1 per cent U.S. equities
market share in May, up from 10.4 per cent a year ago.
BATS Options reported 3.8 per cent market share, in
line with one year ago. In Europe, BATS Chi-X Europe
reported overall market share of 20.6 per cent. Over the
course of the month €411.2bn was reported to BATS’
trade reporting facility, BXTR, setting a new record, with
a new one-day record of €26.8bn on May 13. Moreover,
BATS unveiled new pricing and a lead market maker
(LMM) program for its U.S. Listings business. With the
new pricing, exchange-traded products (ETPs) that
trade more than 400,000 shares per day will be eligible
for a free listing on BATS Exchange.
Source: www.bats.com

Leveraged ETFs Could “Blow Up” the Whole Industry

BlackRock CEO Larry Fink recently argued his view that leveraged exchange-traded funds contain structural
problems that could “blow up” the whole industry one day. Fink runs a company that oversees more than $4
trillion in client assets, including nearly $1 trillion in ETF assets. “We’d never do one (a leveraged ETF),” Fink
said at Deutsche Bank investment conference in New York. Fink spoke during a conversation with Deutsche Bank
co-CEO Anshu Jain in a broader discussion about regulating financial companies. Currently, leveraged ETFs
account for about 1.2 per cent of the $2.5 trillion in global ETF assets under management.
Sources: www.businessinsider.com, written by Tim McLaughlin, www.reuters.com

26
 Insights – news

Managed Futures Still Having a Hard Time BTOP50 Index since 1987

According to the Barclay BTOP50 Index managed futures

are still having a hard time. The index seeks to replicate
the overall composition of the managed futures industry
with regard to trading style and overall market exposure.
It serves as a benchmark to the industry and indicates
how the overall conditions change over time. Over many
years the index was able to rise substantially. However,
not anymore. In 2009 it began to struggle, then made
a short-lived new high in April 2011 only to keep falling
back ever since. Managers are facing further headwinds
as ongoing outflows make matters even worse. However, Over many years the index was able to rise considerably and, at the same time,
some analysts said conditions were worse enough now quite reliably. However, not anymore. In 2009 it began to struggle, then made a
short-lived new high in April 2011 only to keep falling back ever since.
and we could see a major turnaround soon.
Spruce: www.barclayhedge.com
Source: www.barclayhedge.com

Euronext Appoints Dijsselhof as COO

Euronext, a wholly owned subsidiary of IntercontinentalExchange Group

(NYSE: ICE), announced the appointment of Jos Dijsselhof as Chief Operating
Officer (COO) of Euronext with effect from 1st July 2014, pending regulatory
approvals. His role will be to ensure seamless and orderly operations across
Euronext’s pan-European markets.
Mr. Dijsselhof has more than 20 years’ experience in the financial industry.
Until this appointment, he was General Manager Group Hubs at Australia and
New Zealand Bank (ANZ) based in Singapore, where he created and expanded
ANZ’s integrated network of offshore services for Banking Operations, Shared
Services, Technology and Corporate Functions. This covered 9000 staff from
India, the Philippines, China and Fiji. Prior to ANZ, Mr. Dijsselhof worked at
Royal Bank of Scotland where he was the Head of Group Operations for Asia
Pacific and for ABN Amro Bank in Amsterdam as Global head of Financial Source: www.fst.net.au

Markets operations and later as Regional Head of Operations Asia Pacific in

Hong Kong. Mr. Dijsselhof will be a member of the Managing Board of Euronext and will report to Dominique
Cerutti, Group CEO. He will be based in Amsterdam.
Source: www.finextra.com

Algorithm Appointed Board Director

A venture capital firm has appointed a computer algorithm
to its board of directors. The program – called Vital – will
vote on whether to invest in a specific company or not. The
firm it will be working for – Deep Knowledge Ventures –
focuses on drugs for age-related diseases. It said that Vital
would make its recommendations by sifting through large
amounts of data. The algorithm looks at a range of data
when making decisions – including financial information,
clinical trials for particular drugs, intellectual property
owned by the firm and previous funding. ”On first sight,
it looks like a futuristic idea but on reflection it is really a
little bit of publicity hype,” said Prof Noel Sharkey of the
University of Sheffield.
Source: www.bbc.co.uk

27
 insights – news www.tradersonline-mag.com 07.2014

American Markets Since Independence

Sometimes, perhaps all too often, investors, traders, economists, and

mainstream media anchors miss the forest and see only the trees
(growing to the sky or crashing to the floor). To provide some context
on the markets, this chart shows a logarithmic-scale version of the Dow
Jones Industrial Average with extended history ever since December
1789, starting with an index value of 4.3 in today’s terms.
Source: www.zerohedge.com

Brokers‘ Corner

Forest Park FX is a registered forex introducing brokerage firm OANDA has officially opened its offices in Australia. With its new
that offers custom trading solutions for retail traders, service office in Sydney, OANDA is poised to deliver its local customers
providers, institutional traders, money managers, and hedge the same service as in their other offices all around the word.
funds. It offers cash-back rebates for retail traders; custom OANDA already has several thousand active traders in Australia
programming of trading algorithms; administrative and and intends to double the company’s market share in the CFD and
operational support for money managers; market access through FX sector in 2014. The launch in Australia is part of OANDA’s overall
various forex brokers; and customised liquidity for hedge funds growth strategy in Asia Pacific (APAC) – a market that represented
and high-volume traders. 24 per cent of the company’s global growth in 2013.
Source: www.forestparkfx.com Source: www.swissquote.com

28
 TOOLS
NEW PRODUCTS WEBREVIEW SOFTWAREREVIEW
New Products
News from the World of Technology
» FXBeat, the FXStreet produced feed covering Forex
market news and commentary written by Jamie Coleman’s
team, has been upgraded to become a Premium service
for private traders as well as a product available for
third-party companies. Inspired by readers’ requests,
FXBeat’s interface has been improved: Now hosted on
a responsive website (available on any device: mobile,
tablet or desktop) with a refreshed design, FXBeat offers
a new and easier-to-use commentary system. Another
major change is the launch of the FXBeat App (IOS and
Android), on which traders can read and comment on all
posts. The new FXBeat can be trialed by private traders
for 30 days. After that period, to keep access to the feed,
one of the subscription options has to be selected: one
month, six months or one year.
Another novelty is that FXBeat is now offered to
Forex companies. Brokers can choose to integrate
the white-labelled version of the FXBeat feed on their
Fusion Analytics
30
www.tradersonline-mag.com 07.2014
BOOKREVIEW APPREVIEW
website or platform. Their clients will also be able to read
the news in their MetaTrader platform (on “single text
mode”). Besides this monthly subscription to the feed,
brokers can also buy the FXBeat white-label app. More
information can be found at www.fxstreet.com.
» Fusion Analytics announced it released Fusion IQ
Model with stop-loss system. Fusion IQ is a data-
driven tool that fuses technical and fundamental
metrics to generate proprietary stock scores and
algorithmic buy and sell signals. It seeks to help
traders remove the emotion from their investment
and trading decisions. The model ranks stocks, ETFs,
and groups of stocks, and provides Intelli-Stops to
help control risk. Fundamental inputs to the model
include Proprietary EQ, an earnings-quality metric, as
well as fundamental research on markets, groups, and
individual stocks. Subscribers can also join biweekly
strategy session webinars. A 14-day free trial is
available to subscribers. For more information please
visit www.fusioniqrank.com.
» Jack Schwager, the author of the bestselling Market
Wizards series, and FundSeeder.com announced the
launch of Market Wizards Search, an international search
to find yet-undiscovered successful traders. Traders
selected from the search may be featured in Schwager’s
upcoming book, “Undiscovered Market Wizards”. More
details you can find on www.FundSeeder.com.
» DailyFX, a free news and research website from forex
and CFD broker FXCM, delivers analysis of fundamental
and technical influences driving the currency and
commodity markets. It began offering a new line of
premium services for all trading levels and styles.
 TOOLS

DailyFX Plus includes an on-demand trading course » Recognia Inc., a firm that performs technical analysis
along with tools such as trading signals, a technical and quantitative research, announced its launched and
analyser, and FXCM’s proprietary sentiment indicator. enhanced version of its flagship product, Technical
360° Course focuses on the key factors of technical and Insight. The enhanced version includes fundamental
fundamental analysis and the process of probability- analysis along with quantitative strategies. The
based trading with consideration of risk, trade, and enhanced quantitative analytics and additional mobile
money management. It offers private weekly webinars, capabilities were designed to meet the needs of
with market analysis given for the following week. investors, not just active traders. The enhanced version
DailyFX on Demand provides real-time setups based on of Technical Insight includes a new featured ideas
prevailing market conditions and feedback on questions. hub, where investors and traders can see actionable
The service focuses on fundamental events, data trade ideas based on both technical and fundamental
announcements, and real-time data. Additional details strategies. They can also view backtested performance
can be found at www.dailyFX.com. of these strategies to see how well you would have
worked in the past. Recognia covers more than 90
» NinjaTrader, LLC, welcomes Active Indicators to exchanges worldwide and analyses more than 85,000
its expanding ecosystem of Add-On partners. Active instruments daily including equities, indexes, ETFs,
Indicators provides professional market studies and forex, and futures. For more information, click on
indicators built for the NinjaTrader 7 trading platform. www.recognia.com.
Active Indicators was founded with the specific purpose
of providing the opportunity for willing traders to
benefit from exciting and powerful technical tools. recognia Inc.
Founder and Chief Technology Officer, Martin Asher
has devoted the past three years to understanding the
software development process which has enabled him
to automate technical analysis methods previously only
believed to be applied manually. The result is the launch
of their signature product, GeoKing v1.0 for NinjaTrader, a
comprehensive market level identifier providing both the
long- and short-term trader with the information needed
to make informed trading decisions. The Active Indicators
model is designed to not only save their clients time
and workload, but also reduces the risk of overlooking
significant market areas allowing them to more easily
and safely manage their trading. For further information,
please visit www.ninjatrader.com.

31
 TOOLS www.tradersonline-mag.com 07.2014

NEW PRODUCTS WEBREVIEW SOFTWAREREVIEW BOOKREVIEW APPREVIEW

Pairtradefinder
How to Use Differences between Stocks Statistically

There is a lot of good charting software on the market, but if you want to use special market-
neutral strategies, it gets difficult. We would like to introduce an English program from Australia that
automatically provides recommendations to buy one stock and sell another after extensive backtests.

» Pairs trading – as the name says – deals with trading a
pair of stocks. One stock will be bought and one stock will
be sold. You will not achieve profits of several hundred
per cent, but the risk is very small. Hedge funds and
professional investors especially use these strategies
to gain continuous profits independent from the market
movement. Jesse Livermore, the best-known trader of all
times, also used this strategy in the 19th century.
The software offers the ability to create a watchlist
after an intensive analysis of stock combinations that
delivers signals in realtime. A money-management
function helps to divide the capital and tells the user when
he should trade correlating stocks and when to close the
position. The hit rate is more than 70 per cent according
to the producer – of course you always have one loser and
one winner in your portfolio, but the difference counts.
Installation and Minimum Requirements
There is a 30 day trial period available for Pairtradefinder.
The installation file extracts the SQL-database with a
huge amount of data. The installation is completed in
about 15 minutes.
The backtest is very extensive therefore eight GB and
a Quadcore-Chip is recommended. We tested with four
GB RAM and have to confirm this. If you compare more
than 70 pairs of stocks, you receive an error indication, if
you are running other programs simultaneously. But 70
pairs are a lot.
Start and Working Principle
After starting the user sees an interface with several
menu points in the upper screen area. The strength of
the program is its automatic delivery of signals as well as

32
 tools

the individual analysis of different F1) Single Analysis and Control Centre of Pairtradefinder
pairs and the tracking of the orders
generated in realtime.
You can choose from all the
world’s stock exchanges and
compare all individual shares
using the ticker symbol. The user
can compare sectors, countries,
commodities, currency pairs and
indices. The main purpose of the
software is the automatic generating
of signals after extensive backtests.
The software needs online access
for the data history and realtime
data for generating signals. Traders
can use Yahoo! free data delayed
by 15 minutes or subscribe to the
provider’s iQFeed. You can analyse every pair based on different charts and backtest the signals on the left for a period of ten
years.
Source: www.pairtradefinder.com
Single Analysis Welcome
The software can be used to
automatically generate trading
signals as well as for making extensive manual analysis. RRGB long and 222 stocks WEN short. You can also select
Figure 1 shows the working screen as well as the a predefined number of stocks, for example 100 stocks on
analysis of the stocks Red Robin Gourmet Burger Inc. each side.
(ticker symbol RRGB) and The Wendy´s Company (WEN) For about two months both stocks increased –
from the restaurant sector. On the left you find the signal RRGB more than WEN. This stock generated a profit of
history and the right bigger part of the screen shows $277.80 whereas the stock WEN achieved a loss of
four charts. $24.42. The difference is nearly $250 – the profit
The signals are generated, if the difference between excluding trading fees, an ideal and profitable signal
the green ratio-line and the moving average is greater that was generated based on backtests of stocks of
than the 2,70 standard deviation – plus or minus. The ratio American restaurants.
equals the price of the first share divided by the price of
the second. If the green line returns below 1,0 standard Backtesting Preparations
deviation, it is recommended to close the position. The You can choose endless shares for backtesting. You
right part of the upper screen shows the current standard name the catalogue, the stock market and with the help
deviation graph that triggered the entry. The left lower of the ticker symbol you can download the appropriate
corner shows the RSI indicator based on the ratio to price history. Figure 2 shows a catalogue for advertising.
recognize divergences. Professional trader Joe Ross There are 13 stocks. There could be more of course,
introduced this technique years ago. The difference but that would increase the necessary computing time.
between the two stock prices is shown as a line on the The number of stocks to the second shows the number
right lower corner. of cycles because every pair is combined with another
On 13th January 2014 an entry signal is generated. one. For 100 stocks this equals 10,000 single calculations,
Long RRGB (entry day green)/short WEN (entry day red). whereas there are only 169 necessary for the advertising
We follow a common strategy in pairs trading, where catalogue to filter the right candidates.
extreme differences in pairs are traded: You bet on the You can use the appropriate ticker symbols and
approximation of the pair. settings of the German stock exchange XETRA to
Each position should be entered with the same amount compare the 30 DAX-shares. It makes sense to analyse
of money. Therefore you have to divide the amount by the the maximum number of years available. Ten years of
stock price. For example $2000 – the position is 30 stocks history are analysable – but the computer will need to

33
 tools www.tradersonline-mag.com 07.2014

F2) Create a Backtesting Catalogue
You can create individual catalogues based on the ticker symbols and backtest
them over the past ten years to find possible pairs.
Source: www.pairtradefinder.com
work the whole night because of the enormous data
involved.
Observe the Best Pairs (by the Computer)
It takes two hours to finish all comparisons for the 13
advertising companies for a backtesting period of ten
years. The user can filter the results further with different
parameters. Figure 3 shows the filtered results of one
backtest where the hit rate and the correlation of the pairs
should equal at least 60 per cent. Only four combinations
F3) Backtest Results
remain from a total of 169. Below the results the user can
display the equity curve of the signals of the chosen pair
as well as the ratio chart that was analysed for generating
the signals. After highlighting the most promising shares,
the user saves the pairs.
From this moment on these shares are listed on the
“home” page and they are supervised. After extensive
backtests the site shows the ideal pairs that are checked
daily. Figure 4 shows a table where the saved backtesting
results were filtered further. The correlation of the pairs
should be over 80 – you recognise the strength by the
green bars. And another filter called “Cointegration” was
implemented.
This indicator is especially useful for pairs trading
and was developed by hedge funds. Pairtradefinder
offers this indicator to private investors for the first
time. It shows the probability of a pair returning to
the average. Cointegration equals a value between
0.01 to 0.99. Ideal trading pairs should have a value
of over 0.90. The table only shows pairs with a value
above 0.80. You can see that there are already five open
positions and two recommended entries. The column
“last refreshed” is important. Here you can see, when
the data was updated. Based on this data new signals
are generated.
In actual trading the list can include more than 200
combinations. To avoid false signals we recommend
analysing individual pairs based on key fundamental
figures and the four charts shown in Figure 4. Key data
from Yahoo Finance is included for
comparing the particular stocks
fundamentally.

Signal-Pilot and Individual Adaptions

If you do not want to develop your
own signals, you can use the signal-
pilot. After the user has prepared
the software for email-distribution,
he/she can have the signals sent to
predefined email-addresses. He/she
can also have an audio-file played
and then enter the position. The
software tells him/her which stock
to buy and which to sell and informs
him/her about the position size
based on the user’s settings. The exit
signals are sent as well.
You can also define different
After extensive backtesting you can filter further for the most promising pairs to be displayed.
entries. The program shows an entry
Source: www.pairtradefinder.com
at 2.7 times the standard deviation.

34
 tools

The user can change that or add F4) Daily Observation with Entry and Exit Signals
marks further away. The developer
recommends this for experienced
pairs traders only.

Conclusion
Pairtradefinder is a professional
investing tool for private investors
for little money in an area that is
usually only implemented by large
hedge funds. You can use this
method with a discount broker with The menu “Home” observes all saved backtest candidates realtime. The coloured marks are hints that the
positions are open or you should take action. Open trades are yellow, entry and exit signals are black.
a small account. There are no costs
Source: www.pairtradefinder.com
for data feed – short of the possibility
of trading the signal exactly the same
minute it was delivered. A position
can stay open weeks and months; therefore this is not per month. If you want to make extensive backtests, you
really necessary. The software costs $395 once or $39 need a computer with a huge internal memory. «

Preview of the next Issue

COVERSTORY PEOPLE

How to Use Emotions for your Trading Interview – Dan Zanger

Both your own emotions and those of the market determine
to a large extent if you win or lose. It’s not without reason
that the following wisdom was established in experienced
trader circles: “Buy fear, sell greed.” We will show you why
dealing with emotions is indispensable for lasting trading
success and how you can benefit from the toxic cocktail of
fear and greed.
Daniel Zanger set the world stock trading record with an
audited annualised return of 29,000+ per cent and in the
process turned $11,000 into over $18 million in less than two
years in 1998 and 1999. He was interviewed for TRADERS´
Magazine for the November 2006 issue. Matt Blackman
talked with him recently in May 2014 to find out how he’d
been doing since then and how he keeps trading the markets.

The August issue of TrADErS´ will be published on 24th July 2014.

35
 TOOLS www.tradersonline-mag.com 07.2014

NEW PRODUCTS WEBREVIEW SOFTWAREREVIEW BOOKREVIEW APPREVIEW

Trading
Weekly Options
Pricing Characteristics and
Short-Term Trading Strategies
by russell rhoads

» A Resource for Understanding and Trading Weekly Options

Weekly options are traded on all major indices, as well as
high volume stocks and ETFs. They continue to surge in
popularity, accounting for as much as 20 per cent of daily
options volume. And while existing options strategy can Bibliography
be used with weeklies, they are particularly conducive to Title: Trading Weekly Options
premium selling strategies and short term trades based Subtitle: Characteristics and Short-Term Trading
on a news item or technical pattern. With this timely Strategies
guide, and its companion video, you will learn exactly Author: Russell Rhoads
how to use weeklies to make more money from option Pages: 272
selling strategies and how to make less expensive bets Price: $85 Hardcover
on short term market moves. Written by Russell Rhoads, ISBN: 978-1-118-61612-3
a top instructor at the CBOE’s Options Institute, “Trading Release: March 2014
Weekly Options” skilfully explains the unique pricing and Publisher: Wiley
behavioural characteristics of weekly options and shows
how to take advantage of those unique features using
traditional option strategies:
Russell Rhoads
• The first book and video combination product focused
Russell Rhoads, CFA, is an instructor for the Options
solely on weekly options
Institute at the Chicago Board Options Exchange. He
• Outlines the most effective trading strategies
teaches about 90 classes a year and conducts webinars
associated with weekly options, including taking
on behalf of the CBOE and a variety of brokerage firms.
advantage of the accelerating time-decay curve when
Rhoads’ 20-year trading career has included positions at a
an option approaches expiration
variety of trading firms and hedge funds. His background
• Filled with the practical, real-world insights of author
includes trading and analysis, and he is the author of the
Russell Rhoads, an expert in this field
Wiley titles Trading VIX Derivatives, Candlestick Charting for
Dummies, and Option Spread Trading. Rhoads graduated
Conclusion
with an MS in finance from the University of Memphis
Created with both the experienced and beginning option
and a master’s certificate in financial engineering from the
traders in mind, this book and video package will help
Illinois Institute of Technology.
you make the most of your time trading weekly options. «

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 TOOLS www.tradersonline-mag.com 07.2014

NEW PRODUCTS WEBREVIEW SOFTWAREREVIEW BOOKREVIEW APPREVIEW

Bloomberg
The Free App for Investors and News Fans

Bloomberg is one of the must-haves regarding data and information for professional market
participants. Most private investors cannot afford the high monthly fee for the distinctive
terminals but Bloomberg offers an interesting app for all iPhone- and iPad-lovers – for free!
Read on about the benefits of the tool for the analysis and the observation of the markets.

» Structure of the App choice of underlyings can be adapted individually and

Let’s start with the test: After the free download of the app
you can see an extensive and well structured homepage.
In the upper area you can find the overview called “World
Markets” which visualises the price development of the
most important stock-, bond-, forex- and commodities
markets. You can choose the periods of one day, one
month or one year. That way the user gets a quick
overview about all relevant markets. The predefined
therefore all important price data – including futures –
are present. The user gets to the “Market Snapshot”
with a swipe to the left, which displays the intraday
development of several assets. The individual watchlist
– which we will discuss later on – can also be reached
with one swipe (from the homepage) and is very handy.
In the lower area you find numerous news-articles.
You should take a look at the categories “Top News”

38
 tools

Bloomberg offers another advantage:

Key figures of fundamental analysis are shown
below the chart and can be analysed.

and “Most Read” to keep up with the news. Here
you will find the articles that are most-read by the
community – a good way to stay informed about the
important topics in short. For those who like audio-
visual content, we recommend the area on the right
side of the screen. Many videos and spoken articles
are offered on different topics like capital markets,
economics and politics.
If you are a news fan, we recommend entering
directly into the area “News”. Here it is all about news
from the world of finance – it is divided into different
areas like politics, economy, technology, comments
as well as sport, lifestyle or science. Bloomberg offers
up-to-date quality videos. If you are only looking for
information on a certain sector, like pharma or energy,
you will also find it with this app. The dynamic price-
ticker on the lower end of the screen helps the user to stay
up-to-date regarding price development – although it is
15 minutes delayed.
• PER, PER to stock market index, PBR, PCR, PUR
• Dividend yield, historical growth in dividend
• Market capitalisation
• Next quarterly statement and so on
The interested stock holder finds further important
key figures regarding P+L, balance sheet and cash flow
in the area “Financials”. They are shown in structured
diagrams for the last year as well as the past five years. The
user can learn about the most important data regarding
the development of sales, net profit and margins as well
as the structure of the balance sheet or the cash flow. The
F1) Homepage

Stock Analysis on the Road

The area “Markets” delivers a good total overview of all
relevant markets in table-form as well as in chart-form.
You can determine individually which markets should be
displayed in which form. An especially helpful feature is
the analysis of individual shares. The user can click on a
stock of his choice and check it based on different factors.
Figure 2 shows an example for the Bank of America share.
The upper area shows all important key figures, the chart
offers a price history of up to ten years and the possibility
to compare competitors in the sector or indices with price
development. Simple indicators like Relative Strength
Index (RSI), Moving Average Convergence Divergence
(MACD) or Bollinger Bands can also be implemented –
therefore even users who analyse based on technical
analysis will be satisfied, although the charting tool only
delivers basic analysis.
Bloomberg offers another advantage: Key figures
of fundamental analysis are shown below the chart and The homepage is the control centre of the app. The user can access current
price data and news as well as audio-visual content and also the watchlist.
can be analysed. The following key figures are available
Source: Bloomberg
under “Key Statistics”:

39
 tools
F2) Single Stock Overview
In the field “Markets” users can check individual stocks – based on fundamental
as well as on technical factors.
Source: Bloomberg
current news is displayed in the news-bar. What more
could you want?
Checking Your Portfolio – with the Watchlist
A tool for investors and traders has to offer one thing
for sure – a watchlist. The app from Bloomberg has
an optimal solution for keeping a constant watch on
your portfolio. We made a virtual portfolio; entering
the positions including price, date and number of
stocks was quick and easy. After entering all shares the
overview shown in Figure 3 is displayed – and it offers
several functions for the analysis of your portfolio. First
you have the possibility of displaying and analysing
the portfolio in different currencies. Especially with
worldwide portfolios that include several stocks
in different currencies, this is a convenience. The
comparison of the portfolio to the price development
of a benchmark is important as well. Bloomberg has
a good solution, because the user can compare the
portfolio to several indices as benchmarks. Figure 3
shows the S&P 500 as a green line and the portfolio
40
www.tradersonline-mag.com 07.2014
F3) Watchlist
Users can start an individual portfolio in the area “Watchlist“ and compare it
with the respective benchmark.
Source: Bloomberg
performance as a white line. Another feature that
should be of use for larger portfolios is the visualisation
of the portfolio based on asset class, sector, region, the
weighting in the portfolio or market capitalisation. The
portfolio owner has all important information at hand
and can make changes, if necessary.
Simple, Structured, Good
Bloomberg’s free app is a really good tool for stock market
fans of all kinds. Offering the latest news, interesting
videos, market overviews or fundamental key figures for
a certain stock – you will find all you can wish for quickly
and easily. Of course, you can save the contents and read
it later offline. Users who do not want to miss important
news can receive top-news as alarms on a tablet or
smartphone.
Our conclusion: The structured display and the quality
of the information and the features speak for the app.
The tool is clear enough for constant market observation
and the ease of use is especially noticeable on the iPad
display. Thumbs up! «
 strategies www.tradersonline-mag.com 07.2014

Pairs Trading
According to Perry Kaufman
How to Profit Regardless of Market Direction

Perry Kaufman is a household name among traders (interview in TRADERS´ 04/2014). His
standard work “New Trading Systems And Methods” was first published in 1978 and by now is
in its fifth edition. In his book “Alpha Trading” published in 2011, Kaufman describes pairs trading
strategies for stocks, indices, and futures. Being a futures trader himself, Rudolf Wittmer wants
to get to the bottom of this and try to implement the approaches for some markets.

» The basic idea of pairs trading is to be independent
of the direction of a market or a stock. It is designed to
eliminate directional risk and bet only on the relative price
change between two financial instruments. Other terms
for pairs trading therefore include “statistical arbitrage”
or “relative-value strategies”. Of course, this will only
work if there are short term inefficiencies between two
markets that are connected by a fundamental correlation.
The Basic Idea
As far as stocks are concerned, the idea of pairs trading
is easily explained. You need to have two shares – i.e. a
pair of stocks – of the same industry that had a similar
price development in the past. Then you will form either
the absolute (stock A minus stock B) or the relative
difference (stock A share divided by stock B) between the
two shares. If the difference widens up to a certain level,
you will bet on a return of this spread by simultaneously
entering a long position in the poorer-performing stock
and a short position in the better-performing stock.
A typical example of such a pairs trade would be a
long BASF position versus a short Bayer position (or vice
versa). Both stocks are from the chemical industry and
are highly correlated in a longer term comparison.
Market Selection in Futures
In his book “Alpha Trading”, Perry Kaufman concludes
that it will only be possible to make good money with
pairs trading in equities, if a correspondingly extensive
use of leverage is chosen. In principle, this is the case
with all relative-value strategies.
We will restrict ourselves in this paper to the use
of commodity and foreign-exchange futures. Naturally
this raises the question of which markets are best

42
 strategies

suited to pairs strategies. The author has decided on other hand, if the indicator falls below -40, crude oil will
one pair each from the fields of energy (crude oil vs be traded long against natural gas being traded short.
natural gas), precious metals (gold vs silver), and In the period of about 15 months shown here, a value of
cereals (corn vs soybeans). The market combination of +40 was exceeded and undercut respectively a total of 18
euro vs crude oil will add an intermarket pairs trade. times whereas a value of -40 was exceeded or undercut a
This pair had been chosen because over the short term, total of 15 times.
a weak euro correlates with declining crude oil prices
and vice versa. Position Sizing
Before a signal can be traded, you need to think about
Calculating the Relative Difference the position sizes ahead of time. One method that has
Kaufman suggests using the stochastic indicator to proven to be particularly effective in futures trading
calculate the relative difference. Here, the unsmoothed is that of volatility-adjusted position sizing. Here,
version is used in the following form: the number of contracts when opening the position
is determined in such a way that both positions have
Stochastic Formula approximately the same absolute volatility range. This
closing price - low of the last n days is achieved by weighting them with the Average True
Stochastic =
high of the last n days - low of the last n days Range (ATR).
The following example may serve as an illustration:
Let’s trade futures on crude oil (CL) against natural gas
This means that the indicator indicates the relative (NG). There are basically two ways to determine the
positioning of the current price in relation to the price number of contracts. One is to start from the existing
spread of the last n days. For a stock that had been capital and adjust the positions to it. However, we will
trading in the last ten days at a high of 22 and a low of choose the other – the second – variant to serve as our
18, the above formula results, at a current price of 19, in example. To this end, we will arbitrarily determine ten as
a stochastic of 0.25 and 25 per cent respectively. Thus, the number of contracts to be traded, i.e. we will trade
the maximum figures of the stochastic are zero when the ten CL contracts with each signal. We will then determine
stock is trading at the low of the observation period, or the ATR over the past eight trading days for CL and NG
100 in the event that the stock is traded at the high of the respectively. Suppose the ATR for CL is $5000 per day
observation period. and contract while the corresponding ATR value for NG is
$10,000. This will then result in the number of contracts
Stochastic Difference
To calculate the spread between two
stocks, simply subtract the respective F1) Stochastic Difference
stochastic values from one another.
The result is a new stochastic
indicator which may vary between
+100 and -100. In both extreme cases,
one share each has a stochastic
value of zero while the other shares
have a stochastic value of 100.
Figure 1 shows the development of
the stochastic difference indicator,
illustrated by the example of crude oil
and natural gas.
As trigger lines, the limits were
initially set purely arbitrarily at +40
and -40. Once the indicator rose This figure shows the stochastic difference (blue line) between crude oil (red) and natural gas futures (green).
above the 40s level, it is assumed At values below -40, a long crude oil/short natural gas spread will be purchased while at values above +40 a
short crude oil/long natural gas spread will be bought.
that the spread has widened too
Source: www.tradestation.com
much in favour of crude oil. On the

43
 strategies www.tradersonline-mag.com 07.2014

T1) Statistical Key Figures contracts is determined for the entire

duration of the trade. If the ATR of
All Trades CL vs. NG CL vs. EC S vs. C GC vs. SI one contract changes dramatically
No. of Trades 328 103 103 88 34 compared to another contract, the
Positive 226 72 67 63 24 fluctuation ranges will follow suit.
Negative 102 31 36 25 10 For the sake of simplicity, we
%profitable 68.90% 69.90% 65.05% 71.59% 70.59% will not adjust the contract sizes
during a trade. Such a dynamic
Mean Value (MV) 1.38% 0.97% 1.41% 1.31% 2.72%
adjustment of position sizing would
MV positive 4.40% 3.70% 4.47% 4.27% 6.68%
make back-calculation dramatically
MV negative (-5.32%) (-5.37%) (-4.29%) (-6.17%) (-6.77%)
more complicated. However,
Biggest Profit 20.77% 15.59% 20.77% 14.23% 15.10%
traders should pay attention to
Biggest Loss (-35.78%) (-20.60%) (-35.78%) (-18.54%) (-23.59%)
these parameters at all times and, if
Standard Deviation (SD) 6.25% 5.59% 6.49% 5.85% 8.19% necessary, readjust their positions.
SD positive 3.60% 3.02% 4.17% 2.78% 4.54%
SD negative 5.63% 5.02% 6.21% 4.77% 7.18% Test Results
To perform the tests, the author
Skewness -1.10 -0.94 -1.42 -1.05 -1.10
has used the Excel-based template
Kurtosis 4.97 2.36 10.56 1.52 2.11
included in Kaufman’s book, using the
Profit Factor 1.83 1.60 1.94 1.74 2.37 CSI’s adjusted contracts as a database.
The test period was from January
The table shows important statistical key figures for the four individual strategies and the overall portfolio.
2008 to December 2013, amounting to
Source: Author’s own calculations
a total of six years. As mentioned early
on, a total of four pairs were tested:

to be traded for NG being five (the ATR value being twice • Crude oil vs natural gas: CL vs NG
as high). This ensures that, in terms of their value, the ten • Crude oil vs EUR: CL vs EC
CL contracts will have the same fluctuation range per day • Soybeans vs corn: S vs C
as the five NG contracts. • Gold vs silver: GC vs SI
At this point, it is necessary to add an important note.
Position sizing in the case under discussion is static. This The resulting capital curves are shown in Figure 2.
means that at the beginning of the trade the number of All the pairs strategies eventually close in positive
territory, but it also becomes clear
that none of the strategies have a
F2) Capital Curves of the Four Pairs of Futures smooth upward ride. Instead, there
is temporarily a more or less large
1,600,000
CL vs. EC CL vs. NG S vs. C GC vs. SI drawdown in each pair of futures.
1,400,000
Since these setbacks occur at
1,200,000
different times, however, combining
1,000,000
the four strategies into one portfolio
800,000
should lead to a significantly
600,000
smoother development as a result
400,000
of diversification. If all four pairs
200,000
of futures are combined into one
0
portfolio, the result for the entire
-200,000
portfolio will be the equity curve
-400,000
shown in Figure 3.
-600,000
31.12.2007 31.12.2008 31.12.2009 31.12.2010 31.12.2011 31.12.2012 31.12.2013 For the portfolio equity curve
The rising overall trend over the entire period is temporarily interrupted by major drawdowns.
in Figure 3, the following notes will
Source: Compiled by the author
also be important: The size of the

44
 STrATEgIES

profit shown can only be assessed F3) Capital Curve of Overall Portfolio
correctly, if it is also known how
4,800,000
much capital needs to be invested to
achieve this profit. To this end, the
author has calculated the margins 3,800,000

required for holding the positions

over the entire period, based on the 2,800,000
assumption that the margin rates
will remain constant. The maximum 1,800,000
margin rate was one million dollars,
so that this value could be used as 800,000
the minimum initial capital. Since
the number of fixed contracts was
-200,000
not changed along with a rising 31.12.2007 31.12.2008 31.12.2009 31.12.2010 31.12.2011 31.12.2012 31.12.2013

capital curve, initial maximum Due to the diversification into four strategies with different pairs of futures, there is a much smoother
development in comparison to the individual strategies.
margin utilisation is slightly more
Source: Compiled by the author
than 70 per cent for a short time,
and then continuously decreases
to percentage rates of between ten
and 20. is about 70 per cent. Percentage-wise, however, the
On the basis of a starting capital of a million dollars, average profits for a winning trade are lower than the
the portfolio shown in Figure 3 will achieve an annual corresponding losses in a losing trade. Only for CL
return of 32 per cent. A risk-averse investor operating vs EC are the average profits (+4.47 per cent) slightly
with a start capital of two million dollars will still achieve higher than the average losses ( -4.29 per cent). At the
an annual return of 21 per cent on the capital he has extreme ends, too, the pendulum swings significantly
invested. higher on the negative side than it does on the positive
side because the largest winning trade is about 20 per
Statistical Key Figures cent, while the biggest losing trade is as much as -35
To get a better sense of the dynamics of the approach per cent. This trend is also confirmed by a comparison
presented, key figures are listed in Table 1. Trading of the standard deviation for positive and negative
frequency is not very high with a total of 328 trades trades. Still, the end result is a respectable profit factor
for the entire portfolio and about 100 trades per of 1.83 at the portfolio level.
single strategy over six years. In the case of the Overall, the statistical analyses show that the
highly correlated gold/silver pair of futures, only 34 approach presented generates predominantly positive
trades were generated. The hit rate for all strategies trading results. If a trade goes wrong, however, things
will be rather uncomfortable and strong drawdowns will
have to be faced. That is why it is very important in pairs
Strategy Snapshot trading for you to bet on several pairs and not to try and
Strategy Name: Pairs trading according to Perry Kaufman be successful with only one pair. «
Strategy Type: Futures pairs trading
Time Horizon: Daily chart
Long A and short B when stochastic difference of the
Setup and
Entry:
A-B pair falls below -40; short A and long B when rudolf Wittmer
stochastic difference of the A-B pair exceeds +40
Rudolf Wittmer, who has a university degree in
Exit: When zero line is exceeded or undercut
engineering, has been active as a fund manager
Risk and Money and hedge-fund consultant in recent years and
ATR-adjusted position sizing is a passionate trader who turned his hobby into
Management:
a career more than 20 years ago. By constantly
Number refining his trading models, he has made a name for
Approx. 1 signal per month and strategy himself as a systems trading specialist in Germany.
of Signals:
rudolf.wittmer@hrconsult.li
Hit Rate: 70% on average

45