insights www.tradersonline-mag.com 07.

2014

Hedge Fund Series

Part 4 – What I Didn’t Learn Working at a Hedge Fund

For those who are suited for it, the hedge fund world has a lot to offer. It is fascinating, challenging,
competitive and enjoyable. The calibre of the people is exceptional. The financial rewards are immense.
A lot of what you need to learn to succeed is out there. We discussed some of it already in Parts 1 and 2
of this series, “What I Learned Working at a Hedge Fund” (TRADERS´ 03/2014 and 04/2014). But some
things you can’t learn at a fund. Rather, they are important to learn outside of a fund, because you won’t
learn it working on the job and because you will want them once you get there.

» Risk-Taking
Ultimately, trading or investing involves putting money at
risk in order to make a return. “No pain, no gain” applies
equally to the fitness and money worlds. All day long,
you are doing the homework necessary to make the best
risk/reward decisions possible. You want the best trade
off between risk and reward, or at least the one that you
are most comfortable with. But no one can teach you
to be comfortable with taking financial risk, and no one
can instruct you in where that comfort point lies. This is
something you have to find out for yourself.
Some of the most famous hedge fund managers are
renowned for being skilled risk takers from a young age.
Steve Cohen was a fanatical and very successful poker

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 insights

player in his youth. Stanley Druckenmiller was the same.

George Soros had much experience from risk, having hid
from the Nazis during World War II. Others, like Michael
Platt of Bluecrest, started investing in the stock market
in their school days, accumulating years of experience
before they even entered university.
Amongst the general population, we can observe
huge differences in risk appetite. I have friends who
invest only in money market funds and very conservative
corporate bond funds and will panic, if their portfolio
drops one per cent from peak to trough. In short, they
have zero risk appetite. On the other hand, I know others
who will trade stocks, on margin, without even having
properly researched them and sit through 20 per cent
swings. Most people will fall somewhere in the middle.
Financial risk tolerance is an individual trait and it is
mostly emotional. If you get scared of risk, or at least of
some kinds of risk, then that is just how you react. If you
love the adrenaline rush, then that is where you get your
kicks.
Given your individual risk tolerance, if you are too
risk-averse or too much of a reckless gambler, then you
will not succeed as a full-time trader. If you are super risk-
averse, then you will no doubt find the whole process of
taking risk to be too uncomfortable to do as a full-time
profession. You want to find balance in your risk appetite
in order to be a good trader – the right blend of seeking
risk in order to make a return, while also being respectful
of risk so that you don’t get carried out.
Risk appetite can change, and for most people it
does fluctuate in their life. Think of wild and reckless
teenagers who will undertake the most risky things
imaginable in the name of “fun”; contrast that with
a cowed elderly person. Many people who would
embrace financial risks and entrepreneurship become
much more conservative and risk-averse once they
have families to support or mortgages to pay. Some
famous traders who used to swing for the fences in
their earlier years are now trying to eke out ten per cent
per year with low volatility.
There are really two components to changing risk
appetite: intellectual and emotional. The intellectual
part means understanding both the risks and rewards
of a particular investment. You carefully consider
how much you could make, how much you could
lose, and the odds of winning versus losing to make
decision informed by the probabilities. For instance, if
you risked one dollar and had a 50 per cent chance of
making two dollars profit, then that is a good bet. If you
understand this way of thinking – that by taking smart

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 insights www.tradersonline-mag.com 07.2014

risks, you can make money over time – it will improve prevent you being too scared of it. But it will also take
your willingness to take risks. On any given trade, you away the adrenaline rush that can come with trading,
will feel better about taking the risk, if you have done thereby giving you a much more level head and balanced
your homework and understand all of the pluses and perspective.
minuses. By cultivating the proper approach to risk and the
The other aspect is emotional. Behavioural finance right level of risk appetite from both angles, you will
research has shown that we are much more sensitive, become a powerful force in the markets. You will turn
emotionally speaking, to a loss than an equivalent gain. into a prudent, sensible risk-taker by nature. This is
No one likes to lose a lot of money, no matter how big the something which no one else can teach you and which is
potential reward was. No one likes to feel a lot poorer and an invaluable resource in the hedge fund world.
also like an idiot, all at the same time.
How do you change your risk appetite? Practise, Drive
practise, practise. To change the intellectual side, One key element of hedge fund pros is that they are
you need to keep working on it. Keep looking at and extraordinarily driven. They work with the focus of
researching different trades, with their respective risk/ a brain surgeon and an intensity that would make
reward ratios, and you will get an idea of what works Superman tire. They want to “succeed” very, very
and what doesn’t. Focus on making good risk/reward much – whether you define it as “winning” or “making
decisions, keeping losses small, and you will start to money” or “being better than the rest”. As such, to be
become profitable. As you become profitable, then successful in that environment, you also need a very
your tolerance for risk improves, because you will powerful drive.
associate risk with winning, rather than losing, and you In any profession, the key to sustained drive is
will grow to understand that dumb decisions are more passion. Ultimately, in order to keep up intense efforts
damaging than well thought-out trades that happened over time and to compete with top-flight professionals,
to lose. you need to be extremely passionate about the very
The other result of practice is increased exposure. thing that you are doing. If you want to be a top-
As you get more and more exposure to risk, then you notch basketball player, you have to love playing and
become desensitised to it and it loses its emotional practicing basketball; nothing else will get you there.
hold. Sensibly done, increased exposure to risk will If you are in it for the money or the glamour, it will not
keep you going.
Thus, you have to think about
F1) Disposition Effect the hedge fund world and find
something that speaks to you
Joy and makes you passionate. It
has to connect on a very deep,
emotional level, otherwise it is
pointless. Maybe it could be the
research aspect of finding a good
investment. One Market Wizard
Loss Profit
called it a “Treasure Hunt”. It could
- 50 $ + 50 $
be the desire to solve puzzles; Bruce
Kovner, another Market Wizard,
loved the intellectual challenge of
figuring out what is going on in the
world. It could be more intellectual
Pain – George Soros described himself
as a “failed philosopher”, but from
Most people are affected by this. The Disposition Effect describes a tendency of covering profitable trades
but holding on to losing trades. Also, losses are felt with much higher intensity than winning trades of the his book “Alchemy of Finance”, it
same dollar amount. Therefore, the effect causes people to do the exact opposite of a well-known best is clear that he loved developing
practise, namely “let winners run and cut losers short”.
and testing various intellectual
Source: TRADERS´ graphic
theories in the market. Obviously,

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In order to keep up intense efforts over time and to
compete with top-flight professionals, you need to be extremely
passionate about the very thing that you are doing.
the specific passion will differ by person, but you get
the idea by now.
Once you find an angle to the hedge fund world, one
that makes you passionate, make sure you are in a role
where you play to that passion. If you love the treasure
hunt, then you shouldn’t be designing quantitative,
trend-following systems. If you like global politics and
economics, then you shouldn’t be taking activist positions
in companies. You get the idea. Make sure you know what
your passion is and then find a role that lets you indulge it
every day of your life. In order to work hard and well, you
need to find something you enjoy. You need to feel like it
is not work at all, and that it is something you would be
doing for free.
This goes hand in hand with risk-taking. If you
are passionate about the job, then you will be more
interested in and better able to handle taking risks. You
will do the work necessary to sharpen your decision-
making. You will want to stay in the industry and you will
want the rewards from the job, which will let you be more
comfortable taking risk.
In addition, when there are rewards to the job, enjoy
them. Be grateful. Say a “Thank you” to the universe,
if you met someone really interesting or found a great
investment. If you work hard and have a fabulous year,
give yourself a pat on the back in some form. It could be a
treat to yourself like a new car or a special vacation with
your spouse. By focusing on the benefits, you will be
better able to sustain your drive and motivation.
Intellectual Curiosity
This is related to passion. We need to be genuinely
intellectual curious because we want to learn. There is a
lot to learn in the hedge fund world. We have to research
everything that is relevant about our investments. We
have to read up on the world and be sensitive to how
it could impact our investments. We need to study
ourselves and our past trades to examine what is
working and what we could change. Thus, the job
requires genuine intellectual curiosity just to sustain the
necessary effort.
INSIGHTS
There is an additional layer. To be successful at trading
in general, you need an “edge” of some sort. Usually, this
is a way of making decisions and getting into and out of
trades that will give you a consistent advantage and make
you a winner net-net. But each person’s edge is different
because our personalities are different. Very methodical
and systematic traders would embrace quantitative
systems, whereas action-oriented decision makers, like
athletes and poker players, would be better suited to
trading actively.
In order to be the best, you need tremendous
intellectual curiosity, because you always need to be
on the hunt for the best opportunities and to want to
research them. But you also need it, in order to study
yourself and what you are doing in a way that you can
define and then constantly work on your “edge”. You can
only find what works for you by exploring many different
paths and strategies in the market and by holding a
mirror up to yourself. This kind of introspection and
exploration would only occur to people with genuine
intellectual curiosity.
The one pre-requisite for intellectual curiosity
is fascination. Think of little kids. They stare at
something, like a star-filled sky or a dollhouse, with
wide-eyed wonder and instantly want to know more.
They are hooked. Just like with passion, there should
be something about markets that fascinates you, that
draws you in. That is the stepping stone to learning
about everything else.
Next month, in our next piece of this series, it is all
about process. Stay tuned! «
Bruce Bower
Bruce Bower manages a portfolio of emerging
market equities at a hedge fund. He has a keen
interest in markets, psychology and self-develop-
ment, having trained as a hypnotherapist.
www.howoftrading.com
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 INSIgHTS www.tradersonline-mag.com 07.2014

Trade What you See

Hindsight Is Easy but you Can’t Make Money from It

A recovery could be on the way, but it may not be very exciting. Private investment guru Clem
Chambers, CEO of ADVFN.com and author of “ADVFN Guide: A Beginner’s Guide to Value Investing”,
weighs up the possibilities for a boom or a crash.

» They say, you should trade what you see. Hindsight is a

Clem Chambers
Clem Chambers is CEO of ADVFN (www.advfn.
com) and author of several books such as “101
Ways to Pick Stock Market Winners” and “A
Beginner‘s Guide to Value Investing“.
much easier style of vision but it is hard to make money
from it, unless you are a journalist or a politician.
What I see is a recovery. But not much of a recovery.
Does that lacklustre situation lead to the possibility of a
lot more recovery to come and more stock market rallies
or does it set the scene for another topple into economic
oblivion?

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 insights

Unlike the markets since 2008, F1) 15 Years of the FTSE

the market is no longer cheap. In
fact, many claim it is a bubble.
However, bubbles don’t look like
the current market. At best, equities
have reached a ceiling which history
suggests is the top of the market.
A bubble would see the Dow at
20-30,000 points.
The markets of the US, Europe
and Japan are at worst a little
expensive. This mild situation won’t
save them from crashing or for that
matter rocketing upwards; there is
simply the uncertainty of average
times to be dealt with.
In a bubble it is easy to say the A massive head and shoulders pattern should make investors nervous.
Source: www.advfn.com
market will correct, only timing is
the issue. In a crash it is easy to think
about buying because like bubbles
there is a bottom to the market where it is so cheap it This supports asset prices and creates a wealth effect
cannot retain its low levels for long. by creating asset price inflation. Assets can be used as
The same can’t be said for a normal market. It is either collateral to borrow and then consume. It is an asset
up or down. Yet even an investor wants to dodge a crash liquidation, in lieu of wealth creation.
like 2008 or 2000-2002. Under this model assets are supported by asset price
inflation through money printing aimed directly at the
The Arguments for a Bull or a Bear providers of credit. It is a massive leverage play.
Which way will the markets move? This loop is unescapable while countries continue
So what could cause a boom and a bubble or a crash? For to have massive fiscal deficits. As such, assets are the
a bull, the big picture is sovereign
debt. What is poorly understood
is that the public sectors of the F2) 15 Years of the S&P 500
developed world have become such
a drag on the wealth creating sector
that recoveries are undercapitalised
and therefore anaemic. The income
creators have become outnumbered
by the wealth consumers and the
developed world has eaten through
much of its capital seed corn. This
means there is no real boom of wealth
creation to pay down or finance ever
increasing sovereign debt. This
leads to QE where governments
buy bonds off themselves to print
cash and retire government debt
to suppress interest rates and by a
The chart shows that the market has gone up and up and up.
chain of collateralisation force more
Source: www.advfn.com
cash into the economy.

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 insights
Assets are the place to be and assets
that are liquid are best – because if trouble strikes this huge
economic experiment, you want to be able to exit fast.
place to be and assets that are liquid are best – because if
trouble strikes this huge economic experiment, you want
to be able to exit fast.
Equities are a great place to be for this. US QE has
created a great bull market for stocks. Unless America
can sort out its finances, QE or equivalent policies will
have to stay in place until ultimately a long way down the
line, the wheels come off. This model could drive a boom
and bubble cycle that could run for years.
How about a bear case? The obvious thing to state is,
“look at the charts,” don’t they look toppy to you? They
do, unless of course the trends of the last 15 years are
going to be broken as they must someday.
QE is going away. It is being tapered back and that is
going to hurt. You might say that QE still exists, even if it
is being shrunk, but someday soon it is going to be gone.
Then there will be a return to grinding recession.
Taxes are going to go up to balance budgets; interest
rates are going to rise. That’s going to make a mess of the
recovery and we will get a pullback in line with previous
crashes because we’ve had the recovery from the credit
crash and now we are due for another crash.
F3) The S&P Shot up over the Last Two Years
A close look at the last two years shows the steady rise.
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Just because it wasn’t much of a recovery for the man
in the street doesn’t mean we can’t have another crash.
The markets can’t go higher, they are already too high.
When the spigot of money finally dries up so does the
stock market’s rise and that is near enough that the party
is already over.
A Look at the FTSE and the S&P 500
The charts may give us some guidance
So which position is correct? Let’s look at the FTSE. If
that chart doesn’t make you nervous, nothing will. What
a massive 20 years “head and shoulders.” I am no fan of
the “head and shoulders” pattern, but I’m just pointing it
out for those that are.
I look to the upside. If the FTSE broke out of this
massive channel the upside would be huge. Indeed, it
would suggest a boom and bubble to come. So you can
look for the market to slip over the brow of the next crash
or wait for the break out of a generation. In a sense, you
can have your cake and eat it!
So what about the S&P 500? This is the mother of all
indexes and it looks like a potential model for the FTSE
100. It has made its generational
break out and is running away to the
moon.
Since June 2012 the S&P has
been running on rails like a train. Is it
about to leave the tracks? Luckily the
tracks are well defined.
Conclusion
So perhaps we do need to trade
what we see after all. The trends
of the new economic order, where
markets are no longer free, are clear
enough to ride. When the story
changes it will soon show itself in
the charts because a bubble and
a boom means up and a crash will
show itself in a tell-tale clear break
in what has been up to now an
Source: www.advfn.com
uninterrupted bull run. «
 INSIgHTS www.tradersonline-mag.com 07.2014

Portfolio Metrics
An Abnormal Fixation on return

Trading and investing are done with one major purpose in

Dirk vandycke
Dirk Vandycke has been actively and independently
studying the markets since 1995 with a focus on
technical analysis, market dynamics and behavioural
finance. He writes articles on a regular basis and
develops software partly available at his co-owned
website www.chartmill.com. He teaches software
development and statistics at a Belgian University.
dirk@monest.net
mind: making profits. Even though preventing losses are part
of the package as well, one’s returns seem to be the ultimate
(dis)proof of one’s ability. In this article we are going to take a
shot at convincing you of why looking at returns is a very bad
idea when it comes to estimating one’s long term potential in
financial markets. And of course, we will end up suggesting
what better indicators there might be.

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 insights

We see way too many

patterns and causal relationships.

» Making it alive running through a dynamite factory with
a burning match in your hand doesn’t mean you are not
an idiot. More accurately, it doesn’t mean deciding to do
so was a good idea to begin with. Welcome to our biased
world.
The Third Monkey
As evolutionary biologists well know by now, we are a
species (not the only one) of overactive pattern seekers.
During our evolution, this started out with physical
patterns but quickly turned into looking for causal
relationships as well. All of this is good, because it has put
us where we are today. The sons and daughters of a very
impressive chain of survivors harnessing those powers
along the way. However, falsely recognising something
that isn’t there, doesn’t diminish our survival chances.
Not seeing what actually is there, almost guarantees not
handing over genetic material to the next generation. So
up until today, we see way too many patterns and causal
relationships.
Biases in Abundance
The relationship relevant in the search for where our
obsession with returns comes from, is the one between
the decisions we make (process) and the outcomes we
eventually get. To most it is crystal clear that with good
decisions must come good results. And while affirming
the antecedent we wrongly turn this upside down into
good results having to be proof of good decisions made.
Unfortunately there is a lot wrong with this default view.
Figure 1 shows that with good and bad decisions on
in the former case and dumb luck in the latter. For an
individual occasion we are talking (four) possibilities, but
in a repetitive frame, sticking to good decisions will on
average have good results as output. That is probability
taking over. Having four possibilities doesn’t mean they
will share equal likelihood (25 per cent).
Judging decisions on their outcome, although not all
that is known now was known at the time the decision
had to be made, is what is called outcome bias. Its close
friend, hindsight bias, states that we are prone to estimate
what we knew or how we felt making the decision. The
”I knew effect”. Well, you probably didn’t know it then!
While similar to the outcome bias, the two phenomena
are markedly different. The hindsight bias focuses on
memory distortion to favour the actor, while the outcome
bias focuses exclusively on weighting the past outcome
heavier than other pieces of information in deciding, if a
past decision was a good one.
F1) On Decisions and Outcomes
decision (process)
possibility
probability good bad
deserved dumb
good
success luck
outcome

one side and good and bad outcomes on another, there bad poetic
bad
luck justice
are four, not two, possible combinations. So on any
individual occasion, good decisions may unfortunately
This table shows how outcomes might relate to decisions made.
turn into bad outcomes while good outcomes may spring
Source: www.chartmill.com
from even bad decisions. That is what we call bad luck

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F2) Expectancy Depicted as Scales Profi t (De)bunk(ing)

There is no shortage of fisherman’s
yarn in the financial industry.
One way to defuse the excessive
importance we put on returns (after
all the good outcome we are looking
for), is to put them in perspective
on a larger time scale. We present
you Table 1, a table of long term
compound returns. In blue, we have
the average risk free return over
the past 53 years. In red Warren
Being profitable in the long run with trading, and every investing enterprise for that matter, is about cutting Buffett’s net worth is shown, while
losses and letting profits run. Although this is a hearsay thing of ages, statistical expectancy actually proofs in green and yellow we have the
the saying mathematical. It is not about being right or wrong but handling both profits and losses well.
GDP of Belgium (a small country)
Source: www.chartmill.com
and the USA (a very large country).
Now that should put it into
perspective, a few of the examples
A colleague once tried to convince me of the fact that of great returns. For instance on the lowest row we have
it seemed obviously a good idea, at least to him, having the winner of a one-month guru competition. Simple math
bought shares of a tumbling bank in 2008 a week before indicates that these examples are highly probably just
breaking news. Having made a whopping 200 per cent out plain luck (or fraud) and very likely impossible to be even
of it, he was all confused and surprised by my question, if an average sustainable return. Another one is a service
it had seemed a good idea at the moment when he made stating it is easy to achieve a 200 bucks earning a day on
the decision. Mind the fact that good decisions are not a 10,000 portfolio. Of course you can’t compound or this
restricted to knowing what stock to buy. There is far more would make too much money, we were told criticising this
important decisions a good trader can make, in the absence scam with the same numbers of Table 1.
of knowing what the outcome will be. Selling losers before Repetitiveness and scalability are key in turning your
a mistake turns into a problem is just one of them. traders’ mind around such examples. If something sounds

T1) Cumulative Effect of returns

return per month return per year return over 10 years 100 over 10 years 100 over 60 years
0.21% 2.50% 28% 128 440
0.47% 5.84% 76% 176 3009
1.00% 12.68% 230% 330 129238
2.00% 26.82% 977% 1077 155640877
2.84% 39.99% 2789% 2889 58200000000
3.00% 42.58% 3371% 3471 174904823971
3.13% 44.83% 3960% 4060 447599831447
3.65% 53.70% 7260% 7360 15889960045023
4.00% 60.10% 10966% 11066 183655650658859
5.00% 79.59% 34791% 34891 180424425186733000
10.00% 213.84% 9270807% 9270907 63494091560654900000000000000000
15.00% 435.03% 1921944400% 1921944500 5040168486422420000000000000000000000000000000
So this is what to expect when cumulating profits (given both on a per month as well as a per year base) over ten and up to 60 years. As Einstein put it: “Compound interest
is the eighth wonder of the world. He who understands it, earns it ... he who doesn’t, pays it”.
Source: www.chartmill.com

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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
insights
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. «
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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

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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.
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 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

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 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

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 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

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 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
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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.

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 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

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