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INTRADAY PATTERNS
OF PRICE CHANGE
Importance of entry time 8

LINEAR REGRESSION
OF PRICE AND TIME
Part 3: RSR 14

RELATIVE STRENGTH
MOVING AVERAGES
Part 2: RS VA EMA 22

CATCHING THE
FALLING KNIFE
A case study 34

CHANNEL-BASED
FOREX TRADING
A strategy guide 38

INVESTING IN
DWA-BRANDED ETFS
Market-beating experience? 42
MARCH 2022
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 CONTENTS MARCH 2022, VOLUME 40 NUMBER 3

6 Explore Your Options

by Jay Kaeppel
The Traders’ MagazineTM Got a question about options?

FEATURE ARTICLE
EDITORIAL
editor@traders.com 8 Intraday Patterns Of Price Change
by Richard Poster, PhD
Editor in Chief Jack K. Hutson
Hourly patterns of volatility and
Production Manager Karen E. Wasserman
trend formation are present in price
Art Director Christine Morrison
change data. As a result of these
Graphic Designer Wayne Shaw
hourly patterns, trade entry time
Webmaster Han J. Kim
has an important role in trade entry
Contributing Editors John Ehlers,
Anthony W. Warren, PhD. decisions. “catch a falling knife”? Here’s a
Contributing Writers Thomas Bulkowski, Martin Pring, case study for consideration.
Barbara Star, Markos Katsanos, Leslie N. Masonson, 13 Algo Q&A
Karl Montevirgen by Kevin J. Davey 38 A Channel-Based Forex Trading
Got a question about system or algo Strategy Guide
OFFICE OF THE PUBLISHER trading? by Azeez Mustapha
Publisher Jack K. Hutson
Industrial Engineer Jason K. Hutson 14 Linear Regression Of Price And Here is a trading strategy you can
Project Engineer Sean M. Moore consider adopting for forex trading
Time, Part 3
or other markets, in addition to
by Mike B. Siroky, MD
ADVERTISING SALES some smart guidelines for using this
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4 • March 2022 • Technical Analysis of Stocks & Commodities

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Futures, foreign currency and options trading contains substantial risk and is not for every investor. Only
risk capital should be used for trading and only those with sufficient risk capital should consider trading.
 Explore Your Options
GOT A QUESTION ABOUT OPTIONS?
Jay Kaeppel has over three decades of experience in the options markets. He
was a head trader for a CTA firm, an options trading software developer,
and was a portfolio manager for an investment management firm. He is
presently Senior Research Analyst for Sentimentrader.com. He is the author
of several books, including The Four Biggest Mistakes In Option Trading;
The Option Trader’s Guide To Probability, Volatility, And Timing; and
Seasonal Stock Market Trends. Send your questions or topic suggestions
to Jay Kaeppel at jay@sentimentrader.com. Selected questions will appear
in a future issue of S&C.
Jay Kaeppel

OPTIONS AND SEASONAL TRENDS  roughly 4.4%. For a non-futures trader, the most
Is it possible to trade seasonal trends A trader looking to play this trend straightforward approach is to buy 92
using options? might enter a bullish trade on De- shares of ticker SLV (I will explain
Absolutely. There are often dif- cember 31. The 33rd trading day of why 92 and not 100 shares in a mo-
ferent possibilities available in most 2022 is February 18, which happens ment). With SLV trading at $21.51 a
situations. To illustrate, let’s consider to be the expiration day for options share, this position:
the tendency for the silver market to on SLV.
show strength early in the new year.
From there, we can consider a pos-
sible trade using options on ticker
SLV (iShares Silver Trust).
In Figure 1 we see the annual
seasonal trend for silver futures.
Note that silver tends to see strength
during the first 33 trading days of
the year, with an average gain of

Silver tends to see

strength during the

SENTIMENTRADER.COM
first 33 trading days
of the year, with
an average gain of FIGURE 1: SILVER SEASONALITY. This depicts the annual seasonal trend for silver futures. Silver
roughly 4.4%. tends to see strength during the first 33 trading days of the year (the area indicated here by the red
box), with an average gain of roughly 4.4%. OPTIONSANALYSIS.COM

FIGURE 2: TRADE PARTICULARS. The details are shown here for buying the Feb18 2022 19 strike price call for SLV at $2.62. The breakeven price
for this trade would be $21.62 per share of SLV (iShares Silver Trust). The cost of taking this position can be compared to the cost of taking a long
position outright on the same symbol.

6 • March 2022 • Technical Analysis of Stocks & Commodities

 Explore Your Options
FIGURE 3: RISK CURVES. The risk curves are shown for the option position. The risk curve is overlaid for the long position (92 shares of SLV) for
comparison. The most the option position can lose is $262 if SLV falls below $19 a share, whereas the holder of the share position will continue to lose
−$92 for each $1 SLV declines below $19 a share. So the option position has limited risk to the downside.
• Costs $1,979 to enter
• Has a delta of 92 (that is, for each
$1 SLV moves in price, the option
position will gain or lose $92)
• The trader can hold the shares
beyond the favorable seasonal
period if so desired
A different—and less costly—
approach would be to buy the SLV
Feb18 2022 19 strike price call at
$2.62. This trade:
• Costs only $262 to enter
• Also has a delta of 92
• The breakeven price for this trade
is $21.62 per share for SLV
To put it a different way, the option
buyer pays $11 of time premium to
obtain a stock-equivalent position
while spending only 13.25% as much
as the buyer of 92 shares of SLV ($262
cost versus $1,969 cost).
The particulars for this trade and
the risk curves appear in Figures 2
and 3.
All in all, the option
buyer in this situation
has several advantages
(lower cost, limited
risk, roughly the same
profit potential).
Note that the risk curves drawn in
Figure 3 also overlay the risk curve
for the long 92 shares of SLV position
to allow us to compare the effect of
prices changes for SLV on the option
position versus the share position.
In Figure 3, note that:
• On the upside, the option position
enjoys point-for-point movement
with the share position above the
breakeven price of $21.62 per
SLV share
• On the downside, the most the
option position can lose is $262
if SLV falls below $19 a share,
whereas the holder of the share
position will continue to lose −$92
March 2022
for each $1 SLV declines below
$19 a share
All in all, the option buyer in this
situation has several advantages
(lower cost, limited risk, roughly
the same profit potential). The one
drawback to the option position is that
the option will expire in 49 (calendar)
days. If SLV fails to rally within
that relatively short time period, the
option position will cease to exist.
Where the share buyer can continue
to hold their shares indefinitely, the
option buyer would need to enter
a new trade to participate beyond
February 18.
That said, remember that the pur-
pose of the original option position
was to take advantage of any advance
through February 18. In other words,
this trade was explicitly entered as
a short-term play during the first 33
trading days of the year.
• Technical Analysis of Stocks & Commodities • 7
 FOREX TRADING

Time Is On Your Side

Intraday Patterns
Of Price Change
Hourly patterns of volatility and trend formation
are present in price change data. As a result of these
hourly patterns, trade entry time has an important
role in trade entry decisions.
direction over a fixed duration. Figure 1 shows the
number of trends versus the start hour of the trend
over a period of 11 years. Figure 1 uses a time dura-
tion of 15 bars and a minimum of 66% up bars for

P
rice charts have often been analyzed for
the presence of monthly seasonal pat-
terns, daily patterns, and also hourly
patterns. Time-dependent patterns have
been found to exist for many financial assets over
multiple timeframes. For assets traded on multiple
foreign markets, hourly patterns often exist. In the
forex market, currency pairs are traded 24 hours a
day and asset volatility varies with time of day. For
example, the EURUSD and GBPUSD currency pairs
are most volatile during the open time of the London
and New York markets, while they are least volatile
during the open time of the Tokyo market. Both cur-
rency pairs show a strong relationship between profit
performance and trade entry time.
What’s ahead
In the following sections, I will use the one-hour
EURUSD chart to estimate profit performance as a
function of trade entry hour. Long and short trades will
be considered separately. The variation of volatility
with hour of day will also be examined to see how
volatility influences price change patterns. I will then
show the profit performance from two MetaTrader 4
expert advisors using a barebones trading strategy
enhanced with preferred trade entry times.
a declaration of an uptrend and 66% down bars for
a downtrend. For all charts in this analysis, time is
taken from the broker’s daily server time which, in
this case, is GMT+2 hours.
An analysis of trends is similar to examining long
and short trade performance as a function of trade
entry time. From Figure 1, the behavior of uptrends is
much different than it is for downtrends. Both trend
types have a strong dependence on starting hour. This
suggests that trade profitability should also be affected
by trade entry hour.
Analysis of a simple trading strategy
(the SMA entry hour strategy)
In this section, I will use a simple trend-following
trading strategy to estimate profit performance as a
function of trade entry hour. The trading strategy for a
long trade requires the close price to be above a simple
moving average (SMA) by a threshold amount (pips).

Analysis of a basic trend

ROY WIEMANN

First, for purposes of this analysis, let’s define a FIGURE 1: NUMBER OF TRENDS VERSUS START HOUR. The hourly
trend as a minimum percentage of bars in the same distributions of up and down trends show different variation with time.

by Richard Poster, PhD

March 2022 • Technical Analysis of Stocks & Commodities • 9
FIGURE 2: PROFIT FACTOR VERSUS TRADE ENTRY HOUR. The hourly
distributions of long and short trades show different variation with time.
Similarly, a short trade decision requires the close price to
be below a negative threshold. The profit performance is
measured by the profit factor (PF), which is the profit-to-
loss ratio. The predicted PF, for a chosen SMA period and
threshold, is shown as a function of trade entry hour.
Using a trade simulator, Figure 2 shows the profit factor
for an SMA period of 20, threshold of 10 pips, and take-
profit and stop-loss targets both set at 40 pips. As expected,
the peaks in the profit factor show distinct but differing
optimal trade entry hours for long and short trades.
Volatility and daily time
Throughout the course of a day, both trade volume and
volatility will vary greatly. Figure 3 shows the average bar
volatility for each hour of the day. Volatility is taken as the
As expected, the peaks in the
profit factor show distinct but
differing optimal trade entry
hours for long and short trades.
FIGURE 4: EURUSD PROFIT PERFORMANCE. For the daily entry hour, the SMA-entry hour strategy has a steady profit gain over the test period.
10 • March 2022 • Technical Analysis of Stocks & Commodities
FIGURE 3: AVERAGE BAR VOLATILITY VERSUS HOUR OF DAY. The up
bar and down bar variation of volatility with time are nearly identical.
bar close price minus the bar open price. Up bar volatility
and down bar volatility are computed separately. From
Figure 3, the up bar and down bar volatility are nearly
identical. The differences between Figures 2 and 3 show
that volatility alone does not account for the presence of
optimal entry times of long and short trades for the SMA
entry hour strategy.
Test performance of SMA entry hour
trading strategy
The simple trading strategy of requiring the close price to
be above (long) or below (short) the SMA by a threshold
amount has been implemented in an expert advisor. Ad-
ditional filters for minimum volatility have been applied
along with a requirement to close the trade after a specific
time when the profit is above a pre-defined threshold.
Two optimal daily entry hours for long trades and two
entry hours for short trades are allowed as part of the
strategy. However, the day of the week giving the worst
performance was filtered for both long trades and short
trades. A unique SMA threshold is used for each of the
four allowed entry hours.
The expert advisor was run on the MetaTrader 4 Tester
 Reach your trading goals

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FIGURE 5: USDJPY PROFIT PERFORMANCE. For the weekly entry hour, the SMA-entry hour strategy has a high profit-to-loss ratio and a steady profit
gain.

platform using historical tick data. Figure 4 shows the

profit performance from 1/2010 to 7/2021 for the SMA
entry hour strategy, using a lot size of 0.1.
The strategy performs well throughout the 11½-year
test period. A profit-to-loss ratio of 1.65 and average
profit per trade of $60.0 (1.0 lot) was achieved for 1201
total trades. In comparison, the trading strategy without
the entry time filter gives a profit-to-loss ratio of 1.01 and
average profit per trade of $1.3 for 5,260 trades. Without
the entry time filter, the SMA entry hour strategy is not
a viable trading strategy.
A second version of the SMA entry hour strategy uses
the hour of week (0–119) instead of the hour of day (0–23).
Three entry-hour selections are allowed for both long and
short trades, each with an associated SMA threshold. This
second strategy results in fewer trades but higher profit
performance for most of the six currency pairs tested.
Figure 5 shows an excellent profit performance for the
USDJPY currency pair, using entry hour of week. The
profit-to-loss ratio is 2.60 and average profit per trade is
$57.3 (1.0 lot) for 883 trades.
Conclusions
• Hourly patterns of volatility and trend formation are
present in price change data.
• Because of these hourly patterns, a basic trading
strategy can be turned into a highly effective strat-
egy when entry time is included as part of the trade
entry decision.
• Hour of day (0–23) and hour of week (0–119) both
work well for trade entry time.
A basic trading strategy
can be turned into a highly
effective strategy when entry
time is included as part of the
trade entry decision.
Richard Poster, PhD, has been designing and implement-
ing FX trading models for 10 years along with private
forex trading. He has a PhD in physics and has used the
many techniques and methodologies from his experi-
ence in elementary particle physics research and later
developing electronic warfare systems. He is interested
in applying neural networks, fuzzy logic, fractal analysis,
and quantum mechanics to forex trading models. He may
be reached at raposterbnl@gmail.com or through www.
fxdesignlab.com.
A MetaTrader 4 expert advisor prepared by the author
for this article is available in the Article Code section of
our website, Traders.com.
‡MetaTrader
‡See Editorial Resource Index

12 • March 2022 • Technical Analysis of Stocks & Commodities

 Algo Q&A
ALGORITHMIC TRADING
Have a question about system or algo trading? Kevin J. Davey has over
30 years of system trading experience. Kevin is a full time trader, and also
teaches and consults via his Strategy Factory® online workshop (https://
kjtradingsystems.com). He is the author of 5 bestselling trading books, in-
cluding “Building Winning Algorithmic Trading Systems” and his latest
book “Algo Trading Cheat Codes.” Send your questions or topic suggestions
to Kevin Davey at kdavey@kjtradingsystems.com. Selected questions will
appear in a future issue of S&C.
Kevin J. Davey

APPROACHES TO BACKTESTING
I’ve been algo trading futures for
about three years, and I hear con-
flicting info about backtesting. Can
you share your thoughts?
Backtesting is a very important
part of algo trading. Although there
are a lot of variations on how to do
it, there are really four primary ways
to test a strategy.
The first approach to backtesting is
what most new algo traders attempt:
an optimized backtest. Simply put,
they create a strategy and test it on a
historical price chart. Typically, they
will run thousands or even millions
of iterations, finding the best perfor-
mance case for the strategy (however
they define “best”). They then take
the parameters that produced this best
case and run it live in the market.
This is the approach most trading
software tends to push. The software
makes optimization extremely easy.
The problem is that it is an awful
way to test. The top case from an
optimized backtest rarely works in
real time. This is because the opti-
mization did a best fit to the noisy
market data, which is not likely to
be repeated in the future.
Realizing the inherent problems
with simple optimization, many trad-
ers instead perform what is called an
“out-of-sample” test instead. This
If a trader runs a walk-
forward test multiple
times, eventually the
reliability of the out-of-
sample results begins
to wane.
is the second approach I’ll discuss.
With this method, a certain percent-
age (20–30%) of the data is left out
of the optimized portion of the test.
The strategy is optimized with most
of the data (the “in-sample” period)
and then the best-case parameters are
applied to the smaller out-of-sample
period. If the performance is good
during the out-of-sample period, the
strategy is considered acceptable to
trade.
This simple out-of-sample test is
an order of magnitude better than
standard optimized testing. Even so,
it has potential problems. The biggest
issue is that many algo traders test
and retest their strategy, and repeat-
edly evaluate the performance on the
out-of-sample data. They can do this
so many times that the out-of-sample
data really becomes in-sample data,
since that data is tested over and
over. This dooms most out-of-sample
testers, even though they had great
intentions.
The third approach to backtest-
ing is walkforward testing. It is a
unique approach that maximizes the
amount of out-of-sample results, while
avoiding the problems of in-sample
optimization. An example is shown
Continued on page 20

FIGURE 1: WALKFORWARD TESTING PROCESS. This shows the basic schematic for a walkforward test. In this type of backtest, the in-sample
time window is shifted forward and the test is repeated. This way, you “step through” the data set in iterations. The individual results later combine to
create an out-of-sample performance history.
March 2022 • Technical Analysis of Stocks & Commodities • 13
 Looking For The Highest Risk-Adjusted Performance
Linear Regression Of
Price And Time
Part 3: Regression Sharpe Ratio (RSR)
The relationship between individual security (or
portfolio) performance and volatility is critical and is
constantly changing over time. Here, we introduce a
new measuring tool so you can monitor this changing
relationship. It indicates when a given portfolio holding
is exhibiting deteriorating risk-adjusted performance,
which may suggest it as a potential candidate for sale.
by Mike B. Siroky, MD
In
the 1950s Harry Markowitz at the Univer-
sity of Chicago introduced the concept of
measuring risk-adjusted returns for invest-
ment portfolios. In 1966, William Sharpe
introduced the reward-to-variability ratio,
which today is known as the Sharpe ratio
and is one of the most widely used measures of risk-
adjusted returns. The Sharpe ratio can be applied to
historical returns or expected returns. It can also be
used to measure risk-adjusted performance of an entire
14 • March 2022 • Technical Analysis of Stocks & Commodities
portfolio or to individual securities of almost any kind,
including mutual funds, ETFs, stocks, bonds, commodi-
ties, currencies, and so forth.
The standard formula for the Sharpe ratio is:
Sharpe ratio = (ReturnT – Returnrf ) / SD Eq. 1
where
T = a defined time period, usually one day, and
rf = risk-free rate
ARUGA/SHUTTERSTOCK/COLOR ELEMENTS: NIKKI MOR
As described originally by William Sharpe, the return
of an investment is its mean daily return over any given
time period. The risk-free rate is usually assumed to be
the return on one-year US treasury bills. As I write this,
the annual one-year US treasury rate is 0.07%, or 0.0002%
daily. Thus, the current risk-free rate of return is close to
zero and can be ignored in the vast majority of cases. The
numerator is termed the excess return, or the return of
 QUANTITATIVE ANALYSIS
the investment in excess of the risk-free rate. Currently,
the investment rate of return and the excess return are
approximately the same. SD in equation 1 is the standard
deviation of the excess return in the numerator.
The Sharpe ratio is calculated using daily returns and
then annualized for comparison to other measures of
performance. The Sharpe ratio can also be modified to
calculate the excess return compared to a desired return,
an expected return, or a market benchmark such as the
S&P 500 index.
It is obvious that the Sharpe ratio is the ratio of a
defined measure of performance, compared to that
measure’s risk, defined as the standard deviation of the
measure. One critique of the Sharpe ratio is that a nor-
mal distribution is required for it to accurately measure
risk, and that requirement is rarely met in stock market
prices. Although alternative risk measures exist, such as
the Sortino ratio and the Treynor ratio, the Sharpe ratio
continues to be widely used by analysts as a measure of
risk-adjusted performance.
The regression Sharpe ratio (RSR)
In a prior article in this series on linear regression (see
“Further reading” at the end of this article for references
to other articles in this series), I showed that the slope
of a price-time series gives us the direction of returns,
while the mean of the returns does not. Therefore, we
can achieve a more dynamic estimate of performance
by using the linear regression rate of return (LRRR%),
defined in the equation:
LRRR% = 1 00*[(n–1)*SLOPE(n)] / [Ymean – (n–1) /
2*SLOPE(n)] Eq. 2
In equation 2, n is the total number of data points.
The numerator in equation 2 calculates the total change
in price as estimated by the slope of n prices. The de-
nominator calculates the initial estimated value of price,
using the mean price and the lower half of the slope. The
result is multiplied by 100 to put it in percentage terms.
Equation 2 therefore can be represented as 100 * price
change/initial price.
If we substitute the result of equation 2 for the nu-
merator of the Sharpe ratio in equation 1, we obtain the
regression Sharpe ratio (RSR):
RSR = LRRRR% / SD Eq. 3
In equation 3, SD is the standard deviation of the daily
percentage price change. Although standard deviation of
returns has well-known problems as a measure of risk, it
MICROSOFT EXCEL
FIGURE 1: ORIGINAL SHARPE RATIO VERSUS REGRESSION SHARPE
RATIO (RSR). In this graph, you see a generally good correlation between
the standard Sharpe ratio (X-axis) and the regression Sharpe ratio (Y-axis).
This graph is for the S&P 500 over about two years, n=491. The percentage
of data points in each quadrant are shown in the text boxes.
has the overwhelming advantage of being widely available
on most investing platforms. This makes it possible to
use in scanning and in comparing trend strength. Thus,
we will use standard deviation of daily returns as our
measure of risk. Since the risk-free rate is close to zero,
it can be ignored. The regression Sharpe ratio can be
used wherever the Sharpe ratio is used, but it provides
a more dynamic assessment of price change since it
incorporates the slope of price versus time.
If we look at the correlation between the original Sharpe
ratio and the regression Sharpe ratio or RSR, we obtain
the graph in Figure 1. In this graph, we see a generally
good correlation between the standard Sharpe ratio
and the regression Sharpe ratio. The data points in the
upper-right quadrant and the lower-left quadrant agree as
to direction of prices and add up to 86.76%. That means
13.24% do not agree on price direction, as shown in the
text boxes. In the upper-left quadrant, about 7% have a
negative Sharpe ratio but have a positive slope and are
rising in price. In the lower-right quadrant, about 6%
have a positive Sharpe ratio but have a negative slope
and are falling in price.
Calculating regression Sharpe ratio
in Excel
Calculating RSR in an Excel spreadsheet is relatively
straightforward. Suppose we wish to calculate RSR for
a 25-day time window.
Obtain a data series consisting of dates and closing
prices for the security of choice and import into a blank
Excel worksheet. Place the first date in cell A3. In cell
B3, place the earliest of the price series. In cell C4, calcu-
late the row number using the ROW() Excel function as
follows: =ROW()–1. The result should be 1. Copy these
three columns down to the end of your data.
March 2022 • Technical Analysis of Stocks & Commodities • 15
 In cell D28, calculate the average price over 25 days
using =AVERAGE(B4:B28) and copy down to the end
of your data. In cell E4, calculate the daily percentage
return using =100*(B4-B3)/B3.
In cell F28, calculate the standard deviation of the daily
percentage returns using =STDEV.P(E4:E28).
In cell G28, calculate the slope of price versus time
using =SLOPE(B4:B28,C$4:C$28). Note the dollar
signs in the C column to fix the time parameter to the
first 25 data points.
In cell H28, calculate the regression rate of return, given FIGURE 2: REGRESSION SHARPE RATIO (RSR). Here you see the
regression Sharpe ratio (RSR) for a 25-day window displayed against the
in equation 2 above. The Excel formula is =(2400*G28)/ $SPX over a two-year period ending September 30, 2021. The RSR is in
(D28 – 12*G28). green and the S&P 500 is in black.
In cell I28, calculate the regression Sharpe ratio
(RSR) using =H28/(5*F28). Since the numerator is the
price change over 25 days, it is necessary to scale the
daily standard deviation to the same time period. This
is accomplished by multiplying the daily value by the
square root of 25, or 5. Copy all formulas down to the
end of your data.
In Figure 2, we see a 25-day regression Sharpe ratio
(RSR) in action versus $SPX over a two-year period. Note
that the area between +1 and –1 represents an oscillation
zone, while values outside the oscillation zone represent
significant trends. This is due to the fact that values outside
of ±1 indicate that the price movement is in excess of the FIGURE 3: DATA FOR CALCULATING RSR. Using the Vanguard Total
estimated risk. Later, we will see how to calculate RSR Stock Market ETF (VTI) for the example, the data needed to calculate the
in StockCharts.com and then use this indicator to scan regression Sharpe ratio (RSR) is highlighted in yellow. This data includes
stocks, ETFs, sectors, and market indexes. average price, slope, and standard deviation of daily percent price change.
The daily percent rate of change and its standard deviation are plotted in
You can also calculate RSR using a calculator and the panel below price.
equation 3. You will need three parameters: slope, average
price, and standard deviation. If n=the number of data
points, you will need the average price for n data points,
the slope for n data points, and the standard deviation
of daily returns for n data points. StockCharts.com can
provide this data directly on a chart and you can then
transfer it to your calculator.
In Figure 3, average price, slope, and standard deviation
of daily percent price change are highlighted in yellow.
Average price and slope are placed behind the price but
are made invisible, leaving only the numeric data. Daily
percent rate of change and its standard deviation are FIGURE 4: FREQUENCY DISTRIBUTION OF RSR FOR S&P 500. In this
plotted in the channel below price. histogram, RSR values are on the X-axis and frequency is displayed on the
Y-axis. The time window is about two years ending September 30, 2021,
Converting regression Sharpe ratio n=479. You can see that the highest frequency occurs at RSR=1.25 in a
generally rising market. In a neutral market, we would expect the highest
to a probability estimate
frequency at RSR=0.
The RSR would be even more useful if we could map RSR
values to probabilities. That would give us an estimate of probability distribution that resembles a gaussian curve,
trend strength on a zero-to-1 scale (or zero to 100). How it is rarely even close to a perfect fit. The same problem
can this be accomplished? One method involves using is found with the original Sharpe ratio.
Excel’s normal distribution functions. While RSR has a In Figure 4 we see the frequency distribution for
16 • March 2022 • Technical Analysis of Stocks & Commodities
RSR with n=479. RSR values are on the X-axis and
frequency is displayed on the Y-axis. We see that the
highest frequency occurs at RSR=1.25 in a generally
rising market. In a neutral market, we would expect the
highest frequency at RSR=0.
This is how to map RSR to probability using the nor-
mal distribution function in Excel. For a 25-day time
window, the regression Sharpe ratio has its first value in
cell I28. In Excel, move to cell J28 and enter =NORM.
DIST(I28,0,1,true). This function will convert values
from about –5 to +5 into probabilities ranging from almost
zero to almost 1.00. These are continuous estimates of
the probability that a positive trend is present.
A second method involves using the logistic function. FIGURE 5: STANDARD FORM LOGISTIC FUNTION. Note that X values
This less well-known function was first described in the run from -5 to +5. Y-axis displays the resulting values on a scale of zero
1800s by Belgian mathematician Pierre F. Verhuist to to 1. At X=0, Y takes a value of 0.50.
model the growth of populations that are existing under
resource constraints. The population might be humans,
bacteria, or anything in between that exhibits growth
and decline. In this case, we are using it to model the
growth and decline of tradable assets such as stocks. The
early population growth is rapid and exponential with a
rising slope. However, after hitting resource constraints,
it becomes a logarithmic curve with a declining slope.
Today, the logistic function is used in neural networks,
machine learning, biology, economics, political science,
mathematics, statistics and many other fields.
The equation for the logistic function is:

f(x) = 1 / (1+e−kx) Eq. 4
This function is plotted in Figure 5.
In equation 4, X is a variable, e is Euler’s number
which equals 2.718, and k is a constant greater than or
equal to zero that shapes the steepness of the curve. In
standard form, k is set to 1 and has no effect. Suppose
x=0. Then in equation 4, e−kx = e0 = 1 and the denomina-
tor in equation 4 takes a value of 2. The entire fraction
is then equal to 0.5.
As seen in equation 4, the logistic function is much
simpler and easier to calculate than the normal distribu-
tion. Another major advantage of the logistic function
is that it is more versatile than the normal distribution
curve. By changing the value of k in equation 4, we can
change the shape of the curve. Note in Figure 6 that
with higher values of k, the logistic function has a steep
rise and resembles a step function that saturates at 0.0
and 1.0 quickly. With k equal to about 1.658, the logistic
function closely follows the normal distribution, shown
in Figure 6 as a dashed green line.
When converting regression Sharpe ratio values to
FIGURE 6: LOGISTIC FUNCTION SHOWN WITH VARIOUS STEEPNESS
VALUES. The dashed green line is the cumulative normal distribution
curve for comparison.
probabilities, I generally use the standard curve with k=1
as the default curve. This curve gives a slow progression
to saturation values and therefore has fatter tails than the
normal distribution. However, there may be stocks that
are better modeled with k values higher than 1. This is
something that can only be discovered by experience. Note
that with k=5, the logistic function quickly approaches
its limits and becomes a near-step function that is either
fully invested or not. We will put the logistic function to
work in scanning and portfolio management. 
The RSR takes into account
both performance and volatility,
combining them into one ratio.
March 2022 • Technical Analysis of Stocks & Commodities • 17
 Calculating reward-to-risk odds
using the logistic function
Suppose we wish to find the RSR value that corresponds
to a 3:1 reward-to-risk ratio. That means we need to find
the RSR value corresponding to a probability of 0.75
because 0.75/0.25=3. This RSR value can be termed a
critical RSR. Looking at Figure 7, we see the standard
form logistic curve with k=1. A probability of 0.75 cor-
responds to about RSR=1.10. The exact value is:

−ln(.25/.75) = −ln(.3333) = 1.0986

Under these assumptions, any stock with RSR greater
than or equal to 1.10 has a reward-to-risk odds ratio of
3 or greater.
Looking at Figure 7, we see that as k values increase, the
curve becomes more steep and the RSR corresponding to
0.75 probability falls. Let us assume that for any value of
k, we want to find the critical RSR corresponding to any
probability of p and q = (1–p). Then, from equation 4:
p = 1/[1+exp(–kx)] Eq. 5
p + p*exp(–kx) = 1 and exp(–kx) = (1–p)/p = q/p Eq. 6
Taking natural logs on both sides:
–kx = ln(q/p) and x = ln(q/p)/–k Eq. 7
Multiplying numerator and denominator by –1:
x = –ln(q/p)/k Eq. 8
For any desired odds ratio, the critical RSR and k val-
ues are shown graphically in Figure 7. This chart shows
that for various odds ratios, increasing the k value will
reduce the critical RSR required. For a 3:1 odds ratio,
with k=1, the critical RSR is 1.0986, but if k=2 (red
curve), the critical RSR falls to 0.5493. If k remains at
1 but we want a 4:1 odds ratio (green curve), the critical
RSR rises to 1.3863.
Using RSR for scanning
Now that we have developed a regression-based measure
of risk-adjusted performance, how can we use it to find
stocks likely to be profitable trades? On a practical level,
it is almost impossible to manually examine the large
pool of stocks available for purchase. If you allocated
one minute to look at each of the 6,000 stocks on both
the NYSE and the NASDAQ exchanges, it would take
18 • March 2022 • Technical Analysis of Stocks & Commodities
FIGURE 7: HOW K VALUES AFFECT CRITICAL RSR FOR ODDS RATIOS
OF 2:1 (RED), 3:1 (BLUE) OR 4:1 (GREEN). If the standard logistic curve
is used with k=1, then any RSR above approximately 1 will have odds of
3:1 or better, as shown by the blue arrows.
two and a half 40-hour weeks to examine each one!
There is no alternative to using intelligent scanning
strategies to narrow the stocks you will consider us-
ing technical analysis criteria. The scan criteria I will
describe below will use the StockCharts.com scanning
engine language.
As discussed above, to calculate the regression Sharpe
ratio requires multiplying the slope by 100*(n–1) and
dividing the result by (mean–(n–1)/2 * slope(25)). This
result is divided by (√n * SD) where n = number of data
points and SD = standard deviation. If n=25, then the
numerator of the regression Sharpe ratio is 100*(n–
1)*slope(25)/(AVE–(n–1)/2*slope(25) = 2400*slope(25)/
(AVE–12*slope(25). We then divide by (√n*SD)=5*SD.
This simplifies to 2400/5 or:
480 times slope(25)/(AVE–12*slope(25)/SD
In Stockcharts.com scanning language, we enter:
[[480*slope(25)/[sma(25)–[12*slope(25)]]]/std
deviation(25,roc(1)) > =1]
The regression Sharpe ratio (RSR)
can be used wherever the Sharpe
ratio is used, but it provides a
more dynamic assessment of price
change since it incorporates the
slope of price versus time.
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 This scan line finds any stock in your defined universe
with an RSR >= to 1.0. When RSR is >= 1.0, the monthly
linear regression performance is greater than the noise
estimated by standard deviation and a minimum 3:1 odds
ratio exists. As discussed above, you may want to use
different critical values of RSR depending on desired
odds ratio and risk tolerance. Using RSR, you are seek-
ing not necessarily the stocks with highest performance,
and not necessarily the stocks with lowest volatility, but
rather the highest risk-adjusted performance.
Portfolio management
The RSR takes into account both performance and vola-
tility, combining them into one ratio. Both performance
and volatility are critical parameters that are constantly
changing over time. RSR monitors their changing re-
lationship. By calculating the RSR for all the holdings
in your portfolio, you can eliminate those stocks that
fall below whatever critical RSR value you designate.
If RSR is below zero, then the stock is falling in price
and is a candidate for sale. RSR may or may not be your
primary indicator for selling, but it certainly provides
warning of a deteriorating risk-adjusted performance.
The RSR may deteriorate because of weakening price
performance, rising volatility, or both. Rising volatility
often precedes an obviously falling price, and RSR can
detect this change in relationship.
Mike B. Siroky, MD is a retired surgeon living in Arizona.
He is particularly interested in quantitative analysis and
improving predictive value of technical indicators. He
Now that we have developed a
regression-based measure of
risk-adjusted performance, how
can we use it to find stocks likely
to be profitable trades?
second edition, published on Amazon.com. He may be
reached at mike.siroky@yahoo.com.
Further reading
Siroky, Mike B. [2021]. “Linear Regression Of Price And
Time, Part 1: Three Basic Tools,” Technical Analysis of
Stocks & Commodities, Volume 39: September.
[2021]. “Linear Regression Of Price And Time,
Part 2: The Regression Adaptive Moving Average
(RAMA),” Technical Analysis of Stocks & Com-
modities, Volume 39: October.
[2021]. The Art Of High Probability Investing,
second edition, Amazon.
White, J., and V. Haghani [2017]. “A Brief History Of The
Sharpe Ratio,” https://papers.ssrn.com/sol3/papers.
cfm?abstract_id=3077552
Sharpe, William F. [1966]. “Mutual Fund Performance,”
Journal Of Business, January, pp. 119-138.
‡StockCharts.com
‡See Editorial Resource Index

Algo Q&A
is the author of The Art Of High Probability Investing,

DAVEY/ALGO Q&A
Continued from page 13
in Figure 1. Multiple steps (each step
shown in the figure) are conducted and
the individual results later combine
to create a complete out-of-sample
performance history.
This approach, since it has more
out-of-sample results than the
standard out-of-sample testing, is
a much better indicator of future
performance. But, it can fall victim
to overtesting and over-optimization
too. If a trader runs a walkforward
20 • March 2022 • Technical Analysis of Stocks & Commodities
test multiple times, eventually the
reliability of the out-of-sample results
begins to wane.
A final common approach to back-
testing a strategy is not really back-
testing at all; it is live trading. With
this method, the past has no signifi-
cance, and only the future (real time)
results matter. This approach has the
benefit of avoiding over-optimization
and curvefitting of past data. In that
respect, it is much better than any of
the other methods mentioned.
The downside to live evaluation is
that it can be expensive if done with
real money. Trading an untested strat-
egy live—considering most trading
strategies lose money—is a dangerous
way to play. The upside is you can trust
the results completely, which none of
the other three approaches allow.
Which approach is best? Method
1 clearly falls short, and method 4 is
not practical for most traders. That
leaves out-of-sample method 2, and
its enhanced cousin, walkforward
testing method 3. My experience is
that walkfoward testing is the best
way to go. I’ll expand on walkforward
testing next month.
 MARKET RAP
THE WORLD OF RETAIL TRADING
Emilio Tomasini is an adjunct professor of corporate finance at the
University of Bologna in Italy and is a professional trader. He has au-
dited over 5,000 accounts of traders during 13 years of a real-money
trading competition, giving him unique insights into what helps a retail
trader to succeed. He has expertise in technical analysis and trading
Emilio Tomasini
system design. In this column, he shares his sometimes “unserious”
thoughts on serious topics in finance. In his writings, he hopes to help the retail trader better understand the leap
from unprofitable to profitable trader, firmly believing that the right answers can come only if the right questions
are asked. At his website at www.emiliotomasini.com, he offers some of his expertise in a free video course.

CAN EVERYONE MAKE MONEY
WITH A TRADING SYSTEM?
Nowadays, algorithmic system trad-
ing is booming. There’s a lot of talk
about trading systems. It almost
makes you imagine that sooner or
later, every family will be trading
their own trading system on a screen
where the TV used to be.
When I first started using the
Omega TradeStation 2000i platform
many moons ago to work on develop-
ing trading systems, those of us who
were systems traders were considered
the outcasts of the markets and were
regarded as failed scientists look-
ing for a new job. Now it seems as
though systems trading is following
the same path that technical analysis
faced years ago—when commercial
interests are hyping a product or
service too much, then everything
becomes aggressively misleading
for the audience. The pitch in the
commercials you see for trading
systems is always the same: “Are
you a failed discretionary trader? If
so, simply consider purchasing our
trading systems and you will start
to make money immediately since
it is proven, automatic, etc., etc..” It
is very easy to sell a trading system
to a discretionary trader who has lost
money on trading and feels he has
been wasting his time and efforts. It is
like selling fresh water to somebody
who just crossed the desert.
It’s my goal to demystify trading
systems, even if I am a firm believer in
them myself. (And on this last point,
there is no doubt.) So I will do this re-
pugnant action of criticizing systems
trading for just one reason: I don’t
want the image of it to be tarnished,
much like what happened to technical
analysis in the early days.
What was it that happened? In
past decades, the financial industry
seemed to have kidnapped technical
analysis for marketing purposes and
used it to persuade traders that thanks
to technical analysis, they would
Trading systems are
based on some market
features but markets
change day by day and
features appear and
disappear without notice.
be 100% in control of the markets.
Which is 100% false. When it comes
to the markets, nobody is in control
of anything. If you are lucky and
you work hard and you really devote
yourself to learning to trade, you can
bend the probabilities in your favor.
That is what you can reasonably
achieve, nothing more.
From a false sense of control
derived the disrepute that the insti-
tutional and academic world openly
showed towards technical analysis
but later thankfully more or less
disappeared, now that it is more
integrated with financial analysis. In
March 2022
life, whenever you try to fill some-
thing with a meaning that doesn’t
correspond with reality, the reaction
will be harsh.
The same has tended to happen with
trading systems—their promise and
potential have often been oversold.
It is not true that systematic trading
carries no stress for the trader—a
trading system is not an immutable
and unalterable law of the universe.
Trading systems are based on some
market features, but markets change
day by day and features appear and
disappear without notice. So there is
no certainty in a trading system, only
probabilities.
Another point: It is not true that a
trading system will magically work
while you are sleeping and then you
wake up and can spend all the money
it has made for you. A trading system
must be babysat. The time you save
when it is running is the time you
invested earlier when you developed
the system. Research in quantitative
trading is time-consuming. It needs
programming skills and persever-
ance. It is not a job for everybody.
And in the end, it is not true that all
systematic traders make money.
I can tell you I personally know
hundreds of failed systematic trad-
ers. The reasons you could fail at
systems trading vary. Maybe you
lack programming skills and you
have to rely on others; maybe you
Continued on page 31
• Technical Analysis of Stocks & Commodities • 21
 Price, Volume, And Volatility
Relative Strength
Moving Averages
Part 3: The Relative Strength Volatility-Adjusted Exponential Moving Average
(RS VolatAdj EMA)
You can use calculations of the relative strength of price,
volume, and volatility to filter price movement and
help define turning points. In this three-part series, we
are examining three applications of relative strength:
the relative strength exponential moving average, the
relative strength volume-adjusted exponential moving
average, and the relative strength volatility-adjusted
exponential moving average. Here in part 3, we explore
the relative strength volatility-adjusted exponential
moving average.
In
by Vitali Apirine
this article series, I am introducing three
indicators you can use that are moving
averages based on relative strength. The
three indicators are:
22 • March 2022 • Technical Analysis of Stocks & Commodities
• the relative strength exponential moving average
(RS EMA)
• the relative strength volume-adjusted exponential
moving average (RS VA EMA), and
• the relative strength volatility-adjusted exponential
moving average (RS VolatAdj EMA)
These indicators are designed to account for relative
IQONCEPT/SHUTTERSTOCK/COLLAGE: CHRISTINE MORRISON
strength in price, volume, and volatility, respectively.
These forms of exponential moving averages (EMAs)
reduce the lag of traditional EMAs, making them more
responsive.
This article series focuses on differences between tra-
ditional EMAs and these three relative strength–based
EMA indicators. Here in this article, I’ll describe the
relative strength volatility-adjusted EMA.
 INDICATORS
Relative strength volatility-adjusted
exponential moving average
(RS VolatAdj EMA)
The relative strength volatility-adjusted exponential mov-
ing average (RS VolatAdj EMA) is designed to account
for relative strength of volatility.
RS VolatAdj EMAs with different lengths, or the RS
VolatAdj EMA and EMA with the same length, can be
used to help to define trends and turning points, and can
help filter price movements.
Calculation
The example given here is based on a 10-period RS
VolatAdj EMA.
Current RS VolatAdj EMA = Prior RS VolatAdj EMA
+ MLTP *(1+VolatS*Mltp_VolatS) * (Price – Prior RS
VolatAdj EMA)
Multiplier (the weighting multiplier)
MLTP = 2/ (Time periods + 1)
A formula in MetaStock coding language is given
for the RS VolatAdj SPX VIX in the sidebar, “Relative
Strength Volatility-Adjusted Exponential Moving Aver-
age, In Metastock Code.”
Volatility strength (VolatS)
Volatility strength measures the difference between up
day volatility (UV) and down day volatility (DV). The
volatility strength (VolatS) equals the absolute value
of UV less DV divided by the sum of UV and DV. UV
and DV data are smoothed by an exponential moving
average (EMA).
VolatS =ABS(10-day EMA(UV)-10 day EMA(DV))/
(10-day EMA(UV)+10-day EMA(DV))
RELATIVE STRENGTH VOLATILITY-ADJUSTED EXPONENTIAL MOVING AVERAGE, IN METASTOCK CODE
Here is a formula in MetaStock language for the relative
strength volatility-adjusted exponential moving average,
RS VolatAdj SPX VIX.
EMA(10,10,10):
Periods:=10;
Pds:=10;
Mltp:=10;
Mltp1:=2/(Periods+1);
MICROSOFT EXCEL
FIGURE 1: CALCULATION IN EXCEL FOR RELATIVE STRENGTH
VOLATILITY-ADJUSTED EXPONENTIAL MOVING AVERAGE (RS
VOLATADJ EMA). This Excel spreadsheet snippet demonstrates how
the RS VOLATADJ EMA is calculated. Shown here is the 10-day EMA
and RS VolatAdj SPX VIX EMA(10,10,10). (Note that due to the short
number of data points in this spreadsheet, the values here are not very
accurate but become more accurate with a greater number of periods
under calculation.)
VolatS fluctuates between 0 and 1. When up day vola-
tility (UV) and volatility on down days (DV) are close
to each other, VolatS is close to zero. Rarely, volatility
strength can reach 1 (extreme).
Multiply VolatS by MLTP_VolatS (10) to move the
decimal point over one place.
The Excel spreadsheet in Figure 1 shows a 10-day EMA
and RS VolatAdj SPX VIX EMA(10,10,10) calculation.
A corresponding chart of the S&P 500 index is shown
in Figure 2.
The values of 10,10,10 are the typical settings for the
RS VolatAdj SPX VIX EMA(10,10,10), where SPX is the
S&P 500 index and VIX is the corresponding volatility
index, the first parameter is a moving average length,
the second is a volatility strength length, and the third
VolatC:=Security(“.VIX”,C);
VolatUpDay:=If(C>Ref(C,-1),VolatC,0);
VolatDwnDay:=If(C<Ref(C,-1),VolatC,0);
RS:=Abs(Mov(VolatUpDay,Pds,E)-
Mov(VolatDwnDay,Pds,E))/(Mov(VolatUpDay,Pds,E)+Mo
v(VolatDwnDay,Pds,E)+0.00001);
RS:=RS*Mltp;
Rate:=Mltp1*(1+RS);
If(Cum(1)=Periods+1,C,PREV+Rate*(C-PREV));
March 2022 • Technical Analysis of Stocks & Commodities • 23
 parameter is a volatility strength
multiplier. Other values can be
substituted depending on your
trading style and goals.
The first value for the 10-day
RS VolatAdj EMA is an SPX
close price, and for the 10-day
EMA, the first value is a 10-day
average.
The values for the 10-day
EMA and 10-day RS VolatAdj
EMA shown in the spreadsheet
METASTOCK

in Figure 1 are not very accurate

FIGURE 2: 10-DAY EMA AND RS VOLATADJ SPX VIX EMA(10,10,10). Shown here is a 10-day EMA
due to the short number of data
and 10-day RS VolatAdj EMA on a chart of the S&P 500 index. This chart plots the calculations demon- points shown but become more
strated in the spreadsheet in Figure 1. accurate with a greater number
of periods under calculation.

RS VolatAdj EMA and

EMA
The chart in Figure 3 shows
the CBOE DJIA Volatility In-
dex (VXD) in the upper pane
and the Dow Jones Industrial
Average (DJIA) with a 50-day
EMA and RS VolatAdj DJI
VXD EMA(50,50,10) in the
lower pane. Note that bearish
crossovers were ignored during
a strong uptrend.
FIGURE 3: EMA AND RS VOLATADJ EMA. The chart shows the VXD Volatility Index in the upper pane
The chart in Figure 4 shows
and the Dow Jones Industrial Average (DJIA) with a 50-day EMA and RS VolatAdj DJI VXD EMA(50,50,10) the CBOE NASDAQ Volatility
in the lower pane. Note that bearish crossovers were ignored during a strong uptrend. Index (VXN) in the upper pane,

The RS, RS VA,

and RS VolatAdj
exponential moving
averages are
designed to account
for price, volume,
FIGURE 4: RS VOLATADJ EMA CROSSOVERS. This chart shows the VXN Volatility Index in upper pane,
and volatility
the NASDAQ 100 index with a 50-day EMA & a 200-day EMA in the middle pane, and the same index with relative strengths,
the RS VolatAdj NDX VXN EMA(50,50,10) & RS VolatAdj NDX VXN EMA(200,200,10) in the lower pane for respectively.
comparison. RS VolatAdj EMA crossovers can be used as entry points for long trades during an uptrend.
24 • March 2022 • Technical Analysis of Stocks & Commodities
 UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

IN RE JPMORGAN PRECIOUS METALS Case No.: 1:18-cv-10356 (GHW)

SPOOFING LITIGATION

SUMMARY NOTICE OF PROPOSED CLASS ACTION SETTLEMENT

If you purchased or sold any Precious Metals Futures or Options on Precious Metals Futures on the Commodity Exchange Inc. (“COMEX”) or the
New York Mercantile Exchange (“NYMEX”) from March 1, 2008 through August 31, 2016, your rights may be affected by a pending class action
settlement, and you may be entitled to a portion of the settlement fund.

This Summary Notice is to alert you to a proposed Settlement totaling $60,000,000 (the “Settlement Amount”) reached with JPMorgan Chase & Co.
(“JPMorgan”) in a pending class action (the “Action”).
The United States District Court for the Southern District of New York (the “Court”) authorized this Summary Notice and has appointed the lawyers listed
below to represent the Settlement Class in this Action:
Vincent Briganti
LOWEY DANNENBERG, P.C.
44 South Broadway, Suite 1100
White Plains, NY 10601
Telephone: (914) 733-7221
Email: vbriganti@lowey.com
Who is a member of the Settlement Class?
The proposed Settlement Class consists of all Persons and entities that purchased or sold any Precious Metals Futures or Options on Precious Metals Futures
on the COMEX or NYMEX from March 1, 2008 through August 31, 2016 (the “Class Period”). Excluded from the Settlement Class are: (i) JPMorgan and
any parent, subsidiary, affiliate or agent of JPMorgan, provided, that any Investment Vehicle shall not be excluded from the Settlement Class, but under no
circumstances may JPMorgan (or any of its direct or indirect parents, subsidiaries, affiliates, or divisions) receive a distribution for its own account from the
Settlement Fund through an Investment Vehicle; and (ii) the United States Government.
“Precious Metals Futures” means Gold Futures contract(s), Silver Futures contract(s), Platinum Futures contract(s) or Palladium Futures contract(s), and
“Options on Precious Metals Futures” means any option on Precious Metals Futures.
The other capitalized terms used in this Summary Notice are defined in the detailed Notice of Proposed Class Action Settlement, July 7, 2022 Fairness
Hearing Thereon and Class Members’ Rights (“Notice”) and in the Settlement Agreement, which are available at
www.preciousmetalsfuturesclassactionsettlement.com.
If you are not sure if you are included in the Settlement Class, you can get more information, including the detailed Notice, at
www.preciousmetalsfuturesclassactionsettlement.com or by calling toll-free 1-877-999-4333 (if calling from outside the United States or Canada, call
1-414-921-0344).
What is this lawsuit about and what does the Settlement provide?
Class Plaintiffs allege that Defendants JPMorgan and three of JPMorgan’s former futures traders (John Edmonds, Robert Gottlieb, and Michael Thomas Nowak)
unlawfully and intentionally manipulated the prices of gold and silver futures and options contracts traded on the COMEX and platinum and palladium futures
and options traded on the NYMEX during the Class Period in violation of the Commodity Exchange Act, 7 U.S.C. §§ 1, et seq. and the common law.
JPMorgan maintains that it has good and meritorious defenses to Class Plaintiffs’ claims and would prevail if the case were to proceed. Nevertheless, to settle
the claims in this lawsuit, and thereby avoid the expense and uncertainty of further litigation, JPMorgan has agreed to pay a total of $60,000,000 in cash for
the benefit of the proposed Settlement Class. If the Settlement is approved, the Settlement Amount, plus interest earned from the date it was established (the
“Settlement Fund”), less any Taxes, the reasonable costs of Class Notice and administration, any Court-awarded attorneys’ fees, litigation expenses and costs,
Incentive Awards for Class Plaintiffs, and any other costs or fees approved by the Court (the “Net Settlement Fund”) will be divided among all Class Members
who file valid Proof of Claim and Release Forms (“Claim Form”).
If the Settlement is approved, the Action will be resolved against all Defendants. If the Settlement is not approved, JPMorgan and the other Defendants will
remain as defendants in the Action, and Class Plaintiffs will continue to pursue their claims against Defendants.
Will I get a payment?
If you are a member of the Settlement Class and do not opt out, you will be eligible for a payment under the Settlement if you file a Claim Form. You may
obtain more information at www.preciousmetalsfuturesclassactionsettlement.com or by calling toll-free 1-877-999-4333 (if calling from outside the United
States or Canada, call 1-414-921-0344).
Claim Forms must be postmarked by August 8, 2022 or submitted online at www.preciousmetalsfuturesclassactionsettlement.com on or before 11:59 p.m.
Eastern time on August 8, 2022.
What are my rights?
If you are a member of the Settlement Class and do not opt out, you will release certain legal rights against JPMorgan, the other Defendants, and Released
Parties as explained in the detailed Notice and Settlement Agreement, which are available at www.preciousmetalsfuturesclassactionsettlement.com. If you
do not want to take part in the proposed Settlement, you must opt out by May 23, 2022. You may object to the proposed Settlement, the Distribution Plan,
and/or Lead Counsel’s request for attorneys’ fees, payment of litigation costs and expenses, and any Incentive Awards to Class Plaintiffs. If you want to object,
you must do so by May 23, 2022. Information on how to opt out or object is contained in the detailed Notice, which is available at
www.preciousmetalsfuturesclassactionsettlement.com.
When is the Fairness Hearing?
The Court will hold a hearing via audio teleconference from the United States District Court for the Southern District of New York, at the Daniel Patrick
Moynihan U.S. Courthouse, located at 500 Pearl Street, New York, NY 10007, on July 7, 2022 at 3:00 p.m. Eastern Time to consider whether to finally approve
the proposed Settlement, Distribution Plan, the application for an award of attorneys’ fees and payment of litigation costs and expenses, and the application
for Incentive Awards for the Class Plaintiffs. Any Class Member who wants to participate at the Fairness Hearing can do so remotely by calling the following
toll-free number: 1-888-567-1602 (if calling from outside the United States or Canada, call 1-862-298-0702) on the date and time of the Fairness Hearing.
You or your lawyer may ask to participate and speak at the hearing, but you do not have to. Any changes to the time and place of the Fairness Hearing, or
other deadlines, will be posted to www.preciousmetalsfuturesclassactionsettlement.com as soon as is practicable.

For more information, call toll-free 1-877-999-4333 (if calling from outside the United States or Canada, call 1-414-921-0344)
or visit www.preciousmetalsfuturesclassactionsettlement.com.
**** Please do not call the Court or the Clerk of the Court for information about the Settlement. ****
 the Nasdaq 100 index with 50-
day EMA and 200-day EMA
in the middle pane, and the
same index with RS VolatAdj
NDX VXN EMA(50,50,10)
and RS VolatAdj NDX VXN
EMA(200,200,10) in the lower
pane for comparison. Additional
RS VolatAdj EMA crossovers
can be used as entry points for
long trades during an uptrend.
FIGURE 5: RS VOLATADJ EMA CROSSOVERS. This weekly chart shows the RVX Volatility Index in the The weekly chart in Figure 5
upper pane, the Russell 2000 index with a 10-week EMA & 40-week EMA in the middle pane, and the shows the CBOE Russell 2000
same index with RS VolatAdj RUT2000 RVX EMA(10,10,10) & RS VolatAdj RUT2000 RVX EMA(40,40,10) Volatility Index (RVX) in the
in lower pane for comparison. It is another example when additional RS VolatAdj EMA crossovers can be upper pane, the Russell 2000
used as entry points for long trades during an uptrend.
index with 10-week EMA and
40-week EMA in the middle
pane, and the same index with
RS VolatAdj RUT2000 RVX
EMA(10,10,10) and RS VolatAdj
RUT2000 RVX EMA(40,40,10)
in the lower pane for compari-
son. It is another example when
additional RS VolatAdj EMA
crossovers can be used as entry
points for long trades during an
uptrend.

Trend identification
The chart in Figure 6 shows the
FIGURE 6: BEAR MARKET. This chart shows the VIX volatility index in the upper pane and the S&P
500 index with 100-day EMA and RS VolatAdj SPX VIX EMA(100,100,10) in the lower pane during the CBOE Volatility Index (VIX)
2008–2009 bear market. For trend identification, the 100-day EMA is used instead of a 200-day EMA in the upper pane and the S&P
because it is more sensitive. 500 index with a 100-day EMA
and RS VolatAdj SPX VIX
Generally, RS Price rises
faster than RS Volume EMA(100,100,10) in the lower
and RS Volatility during pane during the 2008–2009
bear market. The 100-day EMA
price growth

was used instead of the 200-day

EMA for trend identification
because it is more sensitive.

Comparing RS, RS VA,

and RS VolatAdj EMAs
Generally, RS Price drops The chart in Figure 7 shows
faster than RS Volume and
RS Volatility when price
the DJIA with a 50 -day
is falling EMA, RS EMA(50,50,10), RS
VA(50,50,10), RS VolatAdj DJI
FIGURE 7: MARKET CORRECTION. Here, you can compare the RS, RS VA and RS VolatAdj EMAs. The VXD EMA(50,50,10) during
chart shows the DJIA with a 50-day EMA, RS EMA(50,50,10), RS VA(50,50,10), RS VolatAdj DJI VXD
EMA(50,50,10) during the 2011 correction. Generally, during a price drop, relative strength (RS) price falls
the 2011 correction. Generally,
faster than RS volume and RS volatility. Conversely, during price growth, RS price rises faster than RS during a price drop, relative
volume and RS volatility. strength (RS) price falls faster
26 • March 2022 • Technical Analysis of Stocks & Commodities
 RS EMA(100,100,10), and
RS VolatAdj N DX VX N
EMA(100,100,10) crossovers
above the 100-day EMA sig-
naled the end of the bear
market.

Conclusion
This three-part article series has
introduced three different indi-
cators that are moving averages
based on relative strength. The
three indicators are: the relative
FIGURE 8: CROSSOVERS ABOVE OR BELOW THE EMA. This chart shows NASDAQ 100 index with
strength exponential moving
a 50-day EMA, RS EMA(50,50,10), RS VA(50,50,10), and RS VolatAdj NDX VXN EMA(50,50,10) from average (RS EMA), the relative
January 2018 to April 2019. It is another example of RS EMA (price, volume, volatility) crossovers above strength volume-adjusted expo-
or below EMA(50) (black ellipses). nential moving average (RS VA
EMA), and the relative strength
volatility-adjusted exponential
moving average (RS VolatAdj
EMA). This article series has
focused on differences between
traditional EMAs and these
three relative strength–based
EMA indicators.
RS crossovers above The RS, RS VA, and RS
EMA(100) signaled
end of bear market
VolatAdj exponential moving
averages (EMAs) are designed
to account for relative strength
in price, volume, and volatility,
respectively.
FIGURE 9: END OF BEAR MARKET. This chart shows the NASDAQ 100 index with a 100-day EMA, RS
Generally, during a price drop,
EMA(100,100,10), RS VA(100,100,10), RS VolatAdj NDX VXN EMA(100,100,10) in the middle pane and the
VXN Volatility Index in the upper pane, with volume in the lower pane during the 2008–2009 bear market. the RS price falls faster than
RS VA EMA(100,100,10), RS EMA(100,100,10), and RS VolatAdj NDX VXN EMA(100,100,10) crossovers RS volume and RS volatility.
above the 100-day EMA signaled the end of the bear market. Conversely, during price growth,
RS price rises faster than RS
than RS volume and RS volatility. Conversely, during volume and RS volatility.
price growth, RS price rises faster than RS volume and The RS, RS VA, and RS VolatAdj exponential mov-
RS volatility.
The chart in Figure 8 shows the NASDAQ 100 index Continued on page 29
with a 50-day EMA, RS EMA(50,50,10), RS VA(50,50,10),
and RS VolatAdj NDX VXN EMA(50,50,10) from Janu-
ary 2018 to April 2019. It is another example of RS EMA
(price, volume, volatility) crossovers above or below the
EMA(50) (black ellipses). VolatAdj EMA crossovers
The chart in Figure 9 shows the NASDAQ 100 index with can be used as entry
a 100-day EMA, RS EMA(100,100,10), RS VA(100,100,10),
points for long trades
RS VolatAdj NDX VXN EMA(100,100,10) in the middle
pane and the CBOE NASDAQ 100 Volatility Index (VXN)
during an uptrend.
in the upper pane, with volume in the lower pane during
the 2008–2009 bear market. RS VA EMA(100,100,10),
March 2022 • Technical Analysis of Stocks & Commodities • 27
 TRADING ON MOMENTUM

Every $10 is a Separate Trading Range

Swing Trading $10 Ranges

Traders often struggle with decid-
ing how to enter and exit their posi-
tions. In this month’s column, you
will see how to trade within $10
ranges.
by Ken Calhoun
Expect consolidation
every $10
I often look at trades in terms of
technical signals versus noise. When
price action is near a multiple of $10/
share (e.g. $10, $20, $30, and so on)
this is often a consolidation, or noise
trading signal is generated once price
action broke out over $21/share.
Step-by-step action plan
Here’s how you can start using this
strategy:

T
he idea is simple enough:
you enter above prices
that are a multiple of $10/
share and exit at the top
of the $10 range. For example, you
would go long just over $20 and sell
(or tighten a trailing stop) once you
get close to $30. Another useful tip is
to never buy a stock that is just under
these $10 range resistance levels.
region. You can see this illustrated in
Figure 1, Ford Motor Company (F),
where price action traded sideways
near $20/share for several weeks. A
Another useful tip is to
never buy a stock that
is just under these $10
range resistance levels.
Step 1: Find a stock that has been
trending upwards for at least 2
weeks.
Step 2: Make note of where the
nearest multiple-of-$10 occurs. In
Figure 1, you would of spotted $20
as this region, for example.
Step 3: Set an entry at $1 above the
multiple-of-$10 area (e.g. $21, $31,

eSIGNAL

FIGURE 1: PUTTING THE BRAKES ON AT $20. Price action in Ford slowed down and consolidated at $20 before breaking out.
28 • March 2022 • Technical Analysis of Stocks & Commodities
 TRADING ON MOMENTUM

$41 are all good entry prices).
Step 4: Set a stop-loss at $1 under
the $10 range. So if you had entered
at $21, you would use $19 as your
stop-loss value.
Insights: Why this
technique works
It’s simple psychology—prices with
a $9 in them tend to look expensive
and are often used as exit targets.
In Figure 1, for example, if you had
bought at $11/share, selling at $19
makes sense. Similarly, if you bought
at $21/share, then $29 is a reasonable
exit target.
This is one of my favorite swing trading
setups because it removes ambiguity. I
know that my trading plan is to buy just
over a multiple-of-$10 price, and exit
near the top of the $10 range.
This is one of my
favorite swing trading
setups because it
removes ambiguity.
Trade management tips
As noted in the example, we use $2
as the maximum stop-loss value. You
can also add to a winning breakout ev-
ery $2 or so on the way up as well. The
main thing is to simply avoid trading
stocks and ETFs in the “noise” zone
right near the multiple-of-$10 area,
because this is where consolidation
and pullbacks most often occur. It’s
helpful to look at every $10 as rungs
on a ladder, and trade within these
price levels using simple entry and
exit prices.
Ken Calhoun moderates a popular
live trading room for active traders.
He is the founder of TradeMastery.
com, an interactive webinar site
for active traders and is a UCLA
alumnus.

APIRINE/RS VOLAT ADJ EMA

Continued from page 27
ing averages are trend-following, lagging indicators, but
reduce the lag of traditional EMAs, making them more
responsive.
RS MA crossovers produce lots of whipsaws in the
absence of a strong trend. RS, RS VA, and RS Volat-
Adj EMAs should be used in conjunction with price
analysis.
Vitali Apirine is a programmer engineer with an inter-
est in technical analysis, especially the application of
indicators such as MACD, RSI, OBV, etc. to trading. He
may be reached at vitapirine@mediacombb.net.
The code given in this article is available in the Article
Code section of our website, Traders.com.
Volatility strength measures
the difference between up
day volatility (UV) and down
day volatility (DV).
FurthEr rEading
Apirine, Vitali [2022]. “Relative Strength Moving Aver-
ages, Part 1: The Relative Strength Exponential Moving
Average (RS EMA),” Technical Analysis of StockS
& commoditieS, Volume 40: January.
[2022]. “Relative Strength Moving Averages, Part
2: The Relative Strength Volume-Adjusted Exponential
Moving Average (RS VA EMA),” Technical Analysis
of StockS & commoditieS, Volume 40: February.

See our Traders’ Tips section beginning on page 50 for ‡MetaStock

implementation of Vitali Apirine’s technique in various ‡See Editorial Resource Index
technical analysis programs and trading platforms. Ac-
companying program code can be found in the Traders’
Tips area at Traders.com.
March 2022 • Technical Analysis of Stocks & Commodities • 29
 FUTURES FOR YOU
INSIDE THE FUTURES WORLD
Want to find out how the futures markets really work? Carley Garner is
the senior strategist for DeCarley Trading, a division of Zaner, where she
also works as a broker. She has written five books on futures and options
trading, with the latest being Trading Commodity Options...With Creativ-
ity (July 2020), as well as A Trader’s First Book On Commodities (third
edition, October 2017) and Higher Probability Commodity Trading (July
2016). Garner also authors widely distributed e-newsletters; for a free
subscription, visit www.DeCarleyTrading.com. To submit a question, email
her at info@carleygarnertrading.com or via www.DeCarleyTrading.com.
Selected questions will appear in a future issue of S&C.
Carley Garner

TRADING LEVERAGED FUTURES
CONTRACTS
What is the best approach to trading
lumber futures and options?
The simple answer is “The aver-
age speculator shouldn’t even think
about participating in lumber futures
or options.” There is a severe lack of
liquidity that creates a nearly impos-
sible arena for speculation. Although
I can think of a few traders I am
familiar with that made a killing in
lumber at one point or another, the
odds are those gains were partially
attributable to luck and were likely
eventually donated back to the market
in the form of losses. The reality is,
lumber futures and, to a lesser extent
options, are useful for producers and
end-users to hedge price risk but
most speculators should steer clear.
Failing to do so has a propensity to
cause emotional and financial mis-
ery. If you are someone who made
money during the 2021 boom and
bust cycle, I would suggest taking
your ball and going home. Those
that push their luck in lumber rarely
come out ahead.
There are a few characteristics
of the lumber market that make
speculating more difficult than other
commodities. To be fair, I have yet
to discover a commodity in which
speculation is easy but the quirky
nature of lumber makes it nearly
unbearable to trade.
30 • March 2022 • Technical Analysis of Stocks & Commodities
Lack of liquidity
The commodity markets are far less
liquid than stocks; yet, there are a
few commodities that are so sparsely
traded they should be off-limits. In
my opinion, lumber is one of them.
Liquidity is important because it
determines how easy a trader can
get in and out of a position without
experiencing price slippage. Remem-
ber, a trader can only buy or sell a
futures contract if someone is willing
I have yet to discover
a commodity in which
speculation is easy but
the quirky nature of
lumber makes it nearly
unbearable to trade.
to take the opposite position at the
desired price. Traders tend to forget
they aren’t owed a fair fill price until
they attempt to execute orders in an
illiquid market.
In liquid markets, the price discov-
ery process is transparent; the bids
and asks are plentiful and visible at
multiple prices above and below the
price the last transaction took place.
But in a dismally thin market such
as lumber, the difference between
the best bid and the best ask can be
surprisingly large. To illustrate, as
I was writing this column in early
2022 the January lumber future was
1220.80 bid at 1228.00 offered and
the March contract was 1307.00 at
1315.00. This means a buyer of the
January contract accepting the mar-
ket price (the best available working
order) would pay 1228.00 but a seller
of a contract wishing to get filled at
the best available price at that time
would get filled at 1220.80. Thus, if
you bought and sold at the same time
you would take a loss of 7.20 points or
$792! Keep in mind, these snapshot
prices occurred on a relatively quiet
trading day. On a volatile day, the
lumber bid-ask spread can be 20.00 to
25.00 points ($2,200 to $2,750). If you
are thinking to yourself, only a fool
would execute at the bid or ask and a
savvy trader would enter an order in
between, you have never been caught
in a lumber position you don’t want
to be in. The majority of the time,
lumber traders are forced to place
limit orders near the bid or ask to get
filled, or prices must come to their
working limit order but that doesn’t
always work out as planned.
Super-trends
Wildly directional trends don’t sound
like a reason not to trade a market
until you are caught on the wrong side
of one. In most commodity markets,
a poorly timed trade can be mitigated
(not fixed) through the use of long
and short options as hedges. Doing
so can stop the bleeding and enable
a trader to regroup. In Lumber, the
 FUTURES FOR YOU
options are so illiquid that using op-
tions to hedge a futures position is
hopeless; even those who are lucky
enough to get filled getting into a
lumber option eventually wish they
hadn’t been. Lumber options are a
lot like the mob, once you are in you
can’t get out.
Without the ability to hedge with
options, traders are forced to either
place stop-loss orders to protect posi-
tions or trade without any risk man-
agement other than their mental stop.
Neither of these are good “options”
(no pun intended). Stop-loss orders
in lumber can easily go unfilled if
there isn’t enough liquidity to execute
the order within the exchange’s price
protection limits. In other words, if
a trader is long lumber futures with
a stop-loss order working beneath
the market but lumber falls so much
so quickly there is not a buyer in the
vicinity of the named stop-loss price;
it is possible prices continue to col-
lapse dramatically further until the
next buy order comes in. If this is the
case, the exchange has a mathemati-
cal equation identifying a price that
MARKET RAP
is “unreasonable” to be reported as
a fill to the working stop order. As
TOMASINI/MARKET RAP
Continued from page 21
didn’t do your homework and didn’t
properly test your systems; maybe
your capital was inadequate to realize
a meaningful performance; maybe
your platform wasn’t up to snuff;
maybe you miscalculated drawdown
and that hit you in the face after just
two trades; maybe you found it too
stressful; and so on.
When you head towards systems
trading, you are basically replacing
some risks with other risks. You are
swapping the risks found in discre-
tionary trading with the risks you
a result, the stop order turns into a
limit order that will only be filled if
the price of lumber rallies back to
the named stop price. In short, the
trader simply has no stop-loss order
at all. Instead, the trader is swimming
naked as the tide is going out.
Limit price moves
Commodities can go locked-limit
and lumber does it often. Futures
exchanges set daily price fluctuation
limits; once the market has moved
the maximum allowable amount in
a single trading session the market
becomes locked limit (limit-up if
prices are moving higher and limit
down if they are moving lower). In
a limit-up market, traders can sell at
the price limit but they cannot buy
unless the price drops below the
limit; in most scenarios trades mostly
stop being executed. Likewise, in a
limit-down market, traders can buy
at the limit price but they cannot sell
unless the price ticks above the limit
price. This creates a sense of panic
for traders who are holding positions
they cannot exit. I can assure you, the
brokerage is just as uncomfortable
as the trader is when lumber traders
will face in systems trading. We can
discuss whether the risks in systems
trading are more or less than in
discretionary trading. But we can-
not portray the idea that systematic
trading is risk-free, easy, and 100%
successful. If that were true, then ev-
eryone would be doing it, and it could
be much harder to find a plumber,
because every plumber would be
sitting in front of a PC running a
trading system without the need to
go out and work.
The reason I care so much about
setting the record straight about
systems trading—even as a systems
trader myself and a strong proponent
of it—is that if we don’t set the record
March 2022
Lumber options are a
lot like the mob­—
once you are in, you
can’t get out.
get caught in limit moves. This is
because markets can gap higher or
lower on the open of the next session
to go locked-limit on consecutive
days. Occasionally, the locked limit
environment persists for days (with
each day moving the allowable price
limit against traders) leaving traders
trapped in losing positions with losses
growing incrementally each locked-
limit session.
In conclusion
Trading leveraged futures contracts is
a stressful and risky endeavor, but the
characteristics of the lumber market
magnify the challenges. Regardless
of how prescient a trader believes
his lumber analysis to be, lumber
is probably not the place to express
those opinions.
There is no certainty in
a trading system, only
probabilities.
straight, sooner or later we will be
treated like crooks selling a story. I
don’t want that to happen. Systems
trading has a lot to offer to the right
person for the job.
And if you want proof that system-
atic trading is not for everyone, simply
call your plumber: if he returns your
call and comes to fix your tap, then
I am right.
• Technical Analysis of Stocks & Commodities • 31
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 A Case Study Of Price Reversal

Catching The Falling Knife

Buying a market that is in freefall is often an intriguing Catching a falling knife: An overview
idea. Do the wisdoms hold up surrounding the adage Before continuing, let’s take a look at a chart that shows
that you should never try to “catch a falling knife”? a “falling knife.” In Figure 1, you can see the British
Here’s a case study for consideration. pound FX futures (see “Further reading” at end for a

by Reza Javaheri

T
hroughout the many active ways to engage the
financial markets—whether it’s semi-regular
rebalancing of a stock portfolio, or daytrading
the so-called FAANG stocks, or swing-trading
spot forex pairs—technical analysis mantras
KNIFE: VOLKOVA OLENA-358/POUND ART:SAM JONAH/SHUTTERSTOCK

and sayings abound. “Sell in May and go

away.” “The trend is your friend.” “Old support becomes
new resistance.”
One such expression—usually along the lines of “don’t
catch a falling knife”—refers to the act of buying a market
COLLAGE: CHRISTINE MORRISON

that is in some degree of freefall. In short, the expression

implies the importance of not guessing the bottom of
a fall in price, waiting until the market stabilizes, and
ensuring that price begins to recover before jumping
back in and going long.
34 • March 2022 • Technical Analysis of Stocks & Commodities
FIGURE 1: A “FALLING KNIFE” PATTERN. Here, the CME British pound
FX futures contract is plotted on a continuous 240-minute candlestick chart.
The falling knife pattern—a sharp, rapid downward movement in price—
follows a sequence of sideways price movement. Could it be profitable to
buy on the way down, or is it best to wait until it turns back up?
 PRICE PATTERNS
FIGURE 2: OLD RESISTANCE BECOMES NEW SUPPORT? Price
formed a moderate pivot high on April 28–29, then broke it with a strong
rally around May 10. Might you look to buy where this previous high broke,
which may become the new low? The hiccup you see at that level on the
way down implies that some traders did buy here, but the low didn’t hold
and the price continued its downward journey.
link to information on this contract at the CME Group
website). It is plotted on a custom continuous 240-minute
candlestick chart. You can see a falling knife following
a sequence of sideways price movement. This knife is
characterized by sharp, rapid downward momentum in
price, with few interruptions until its cessation.
What would constitute “catching” this falling knife?
Even if we try simply to give a qualitative answer, we see
that we quickly introduce room for ambiguity:
• Buying before price has turned around
Well, what constitutes price having “turned
{ Let’s look at some ways this falling knife in the British
around”? A return back to the beginning of the
knife? A break of old highs? Three consecutive
green candles on the chart being observed? RSI
hitting 70?
• Buying on the way down, “guessing the bottom”
Again, when has price stopped going down? The
{ 1. “Old resistance becomes new support”
moment one green candle closes? Three? Five?
• Buying during the formation of a candle as it’s
red
Wouldn’t this approach make any limit buy order
{ broke, citing an area where a previous high broke as the
inherently “catching a falling knife”? Price has
to be traveling downwards in order for a limit
buy order to fill, doesn’t it?
The point is simple: There is no objective way by
which we can declare a falling knife pattern over, so
we must simply use our best judgment. Ultimately, the
warning serves to help traders avoid going long when
FIGURE 3: BUYING THE ORIGIN OF A RALLY IN PRICE? The next buy
strategy under consideration involves entering a long position when price
retraces to the origin of a significant rally in price. Does such a sharp rally
in price indicate an imbalance of buyers and sellers which might result in
a price bounce? In this case, price did bounce, but only slightly and it then
resumed its downward journey.
price momentum is overwhelmingly down, and so this
“mistake” (if we grant the saying credibility) is what we
would seek to avoid. The mantra passes no judgment
on buying a bear market, or buying a market that has
recently experienced a retracement or correction. Rather,
it inherently speaks to short-term, momentum-based,
rapid drops in price and admonishes us not to go long
in the heat of such a moment.
Catching a falling knife: A case study
(British pound futures June 2021)
pound could have been caught, and whether we would’ve
accidentally wrapped our hand around the proverbial
blade. Each of three potential buying strategies around
this chart will be explained, and the likely result of such
a long play discussed.
Price had formed a moderate pivot high on the 28th/29th
of April, and then broke it with a strong rally around
May 10. Perhaps we could have looked to buy when
price returned to the approximate price at which the high
de facto formation of a new low that would hold price
Perhaps we don’t have to
have such a crystal ball.
March 2022 • Technical Analysis of Stocks & Commodities • 35
 up. Clearly, we see that some people followed this line
of thinking, as price slightly hiccupped at that level on
the way down, before quickly resuming its downwards
tumble. So, unless that one blip were scalped for a small
profit, this attempt at catching the falling knife would
have proven unsuccessful.
2. Buying the origin of a rally in price
What if we look to get back in upon getting stopped out
when buying old highs turned new lows (or so we thought)?
Our next strategy involves entering a long position when
price retraces to the origin of a significant rally in price.
Perhaps such a sharp rally in price indicates an imbalance
of buyers and sellers (in favor of buyers) in that area in
price, which in turn could result in price bouncing from
the area upon returning. Sure enough, price did bounce
slightly before resuming its downward march. Again,
unless a bang-bang in-and-out trade was done to capture
some quick profit on the little hiccup, this trade would
also have been a losing one.
3. Buying a further lower pivot low
Let’s say we give this trade a third go. So far, we’ve been
stopped out buying old resistance/new support, and we’ve
been stopped out buying at the origin of a previous spike
in price. Now, our falling knife makes its way down to
another even lower pivot area. Will this area serve as
support, and will this falling knife finally hit the ground
and allow us to pick it up safely?
Sure enough, this was the area that stopped the freefall
in price. This particular support area held, and we saw a
sizeable rally in price out of the area. Some profit-taking
would have been likely.
Conclusion
So we’d have been 1 for 3 taking all three of these trades.
Even better, we would’ve guessed correctly had we
guessed that only the pivot low around 1.3900 was going
to be where price reversed back to the upside.
We must consider the other scenarios, however: What
if we had only taken the first trade? The second? What if
we had taken both, and in our frustration after incorrectly
guessing the bottom twice, called it quits and missed the
What if we had only taken the
first trade? The second? What
if we had taken both?
36 • March 2022 • Technical Analysis of Stocks & Commodities
FIGURE 4: BUYING A LOWER PIVOT LOW? The third buy strategy under
consideration observes price hitting an even lower pivot area. Might this area
finally serve as support? In this case, it did and this particular support area
held. A sizeable rally followed, with some profit-taking likely at this point.
place where price actually did halt and turn back up?
All in all, as we look at “falling knives” in price and
how to approach them, we may never have a concrete
answer as to how exactly to guess the bottom. Perhaps we
don’t have to have such a crystal ball, however. Instead,
rather than playing the odds, we can simply look to wait
things out. When price has put its head down and turned
to the downside like a man on a mission, we can choose
to sit things out. Sure, there will be that one person who
guesses where the thing is going to turn; but for every
one of them, there will be 100, 1,000, 10,000 traders
who eat stop-out after stop-out, trying to catch a falling
knife, and being wrong each time.
The lesson to be learned boils down to the following:
We don’t want to be hopping onto the tracks in front of
an incoming train, guessing that it will stop right before
it hits us so we can grab on exactly at the turning point.
Instead, we stay off to the side, wait for the train to turn
around, and only then grab on.
Reza Javaheri graduated from the University of Penn-
sylvania cum laude with a degree in economics and a
minor in chemistry. He currently works in private equity
in Boston in the areas of debt and derivatives. He can
be reached at rjavaheri2020@gmail.com.
Further reading
Javaheri, Reza [2017]. “Supply & Demand Trading,”
Technical Analysis of Stocks & Commodities,
Volume 35: December.
British pound contract overview, https://www.cmegroup.
com/markets/fx/g10/british-pound.html
 FEBRUARY 24–26, 2022
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 A Long-Term Trend-Following Strategy
A Channel-Based Forex Trading
Strategy Guide
Here is a trading strategy you can consider adopting
for forex trading or other markets, in addition to some
smart guidelines for using this or any other trading
strategy. This trading strategy requires only two color-
differentiated channels on a chart, keeping it simple.
by Azeez Mustapha
M
aintaining a good trading discipline is
regarded as a sure-fire way to succeed as
a trader. To achieve this feat, you have to
cultivate a habit of astute adherence to a
set of rules, making trading an automatic
experience. This habit is known as following
a trading strategy. What is required is finding a trading
strategy that works with your personality and that has
been properly backtested.
That said, a trading strategy is only as good as the
discipline practiced by the trader. One way to gain
confidence in your forex strategy is by backtesting it
extensively. Having confidence in your trading strategy
will make it easier to adhere to, even in times of uncer-
38 • March 2022 • Technical Analysis of Stocks & Commodities
tainty and losses.
When people talk about forex trading strategies, they
are likely referring to a method of executing trades based
on the confirmation of some moving factors in a trading
plan. Along with the provision of entry signals, forex
trading strategies help the user with position sizing, risk
management, and trade exits.
Strategies and trading styles
There are as many trading strategies as there are traders
on earth, making the idea of a perfect trading strategy
a myth. Usually, the best trading strategies are the ones
that conform to your personality and trading patterns.
That said, trading strategies can get adapted to the pref-
erence of the user.
Trying out various trading strategies before settling on
one (or several!) is not a bad idea. For this article, I have
HUNG CHUNG CHIH/SHUTTERSTOCK
curated a tried and tested strategy that you can try out
and adopt if it works for you. Nonetheless, even though
it may work well for me or someone else, you still have
to run personal trials to get acclimated to it. I’ll get to
the nitty-gritty of this strategy in a bit.
 TRADING STRATEGIES
When selecting a trading strategy, one of the crucial
factors to consider is the timeframe it works with. Based
on the timeframe, there are several different trading
styles, from short-term to long-term. These styles have
been used widely for many years and are very relevant
in the strategy-selection process. These trading styles
include scalping, day trading, swing trading, and posi-
tion trading.
Here’s a review of these popular trading styles:
Scalping
This trading style involves executing and exiting trades
within the shortest time possible for quick profits. The
holding period for scalp trades falls anywhere between a
few seconds and five minutes. Scalping aims to quickly
beat the bid/offer spread while scraping off little profits.
Scalping is also one of the most advanced forex trading
strategies in existence and requires an immense time
commitment. This trading style uses lower timeframe
charts such as one-minute, three-minute, and five-minute
charts.
Day trading
This trading style involves the execution and exiting
of trades within or before the end of a day. Day trad-
ing eliminates the chances of getting caught in volatile
overnight moves. Day trading is a short-term trading style
and is probably the most used trading style in the forex
world. Timeframe charts used in day trading include
30-minute, hourly, 4-hour, and daily charts.
Swing trading
Swing trading is a longer-term trading style that involves
executing and exiting trades after extended periods.
Swing trading involves taking trading with the natural
trade cycles of forex instruments for large profits. This
trading style typically requires that trades are held for
several days, weeks, or months. The timeframe charts
used in swing trading include daily, weekly, and monthly
charts.
Position trading
Position trading is a long-term trading style that involves
following market trends in order to profit. Position trad-
ers typically wait for the end-of-day chart to identify
long-term trading trends and opportunities. This trad-
ing style requires an immense amount of patience and
discipline as well as well-grounded market knowledge
regarding market fundamentals. The timeframe charts
used in position trading include 4-hour, daily, weekly,
and monthly charts.
The fused-channel forex trading
strategy
The primary objective of this educationally oriented
article is to offer a long-term (swing) trading strategy
with easy principles that can get adopted easily. The
fused-channel trading strategy is a strategy that could
be used for trading any forex pair as well as other
financial markets such as commodities, indexes, and
cryptocurrencies.
This trading strategy requires only two channels in
different colors for easy identification. However, you
could choose to add support and resistance lines at crucial
levels for better price action determination.
The fused-channel trading strategy is a long-term
trend-following strategy and works better on the 4-hourly
and daily chart.
This strategy tracks the natural cycle of a trending
forex pair, which means that it presents both long (buy)
and short (sell) trade opportunities.
Here is the strategy at a glance:
Strategy snapshot
Strategy name: The fused-channel forex trading strat-
egy
Trading style: Swing trading
Instrument names: All forex pairs
Timeframe: Daily chart
Indicators: Two channels
Buy signal: Enter an instant buy entry after the close of
a bullish daily candle above the down-end of the execu-
tion channel
Sell signal: Enter an instant sell entry after the close
of a bearish daily candle below the upper-end of the
execution channel
Position sizing: 1% of your total portfolio per trade
Risk-reward ratio: 1:3
Stop-loss: Set a stop-loss at the base of the broader chan-
nel for longs and set a stop-loss at the top of the broader
channel for short trades
Take-profit: Exit 50–70% of total profit after TP1 gets trig-
gered and exit 100% of profits at the trigger of TP2.
Along with the provision of entry
signals, forex trading strategies
help the user with position
sizing, risk management, and
trade exits.
March 2022 • Technical Analysis of Stocks & Commodities • 39
 A guide to usage
The following is a guide to
using the fused-channel forex
trading strategy. Again, my
objective with this article
is to present an easy-to-un-
derstand trading technique
that requires nothing but two
indicators on your chart. This
gives you a clean chart void of
distractions.
Because this strategy is a
long-term trading strategy,

TRADINGVIEW
trade signals could occur infre-
quently, and thus, trade setups FIGURE 1: EVALUATING TREND DIRECTION AND DRAWING THE CHANNELS. Draw a channel on the
should be easy to spot. chart to highlight the broader market trend. Then draw another smaller channel (the execution channel) in the
The steps involved in execut- dead-center of the wider channel. Here, I used a blue channel for the broader trend and red for the execution
channel for easy identification.
ing trades using the fused-
channel trading strategy are
as follows:

1. Select the forex pair you’re

interested in trading, and
evaluate the market direc-
tion. Then, draw a channel to
highlight the broader market
trend and draw another smaller
channel (the execution chan-
nel) in the dead-center of the
wider channel. In the chart in
Figure 1, I used a blue chan-
nel for the broader trend and a
red channel for the execution FIGURE 2: EXECUTION CHANNEL. With your selected forex pair, when price is trading in the broader
channel for easy identification. channel, wait for the trend to bring a daily candlestick into the execution channel, either from the upside or
the low side of the channel. The strategy signals a trade when the daily candle closes within the execution
Use a daily chart for better channel. If the candle fails to close inside the execution channel, then the setup is invalidated and you should
execution, as in Figure 1. wait for the next trade setup.

2. With the price of the selected pair already trading
within the broader channel, wait for the trend to bring a
daily candlestick (that is, price) into the execution chan-
nel, either from the upside or the low side of the channel.
(See Figure 2.)
execution channel, following a successful trade setup.
TP2 should be set at the opposite end of the broader
channel. A stop-loss should be set on the broader chan-
nel below the execution channel. (See Figure 3.)

3. Execute an instant trade order (buy or sell) once a

daily candle closes within the execution channel. That
said, the failure of a daily candle to close within the
This trading strategy
execution channel means the trade setup is invalid and requires only two channels
that you should wait for the next trade setup. in different color codes for
easy identification.
4. This trade strategy comes with two take-profit (TP)
levels. TP1 should be set at the opposite end of the
40 • March 2022 • Technical Analysis of Stocks & Commodities
 At the trigger of TP1, you
can move your stop to secure
at least 50–70% of the total
profits, to avoid sudden change
in market trends or “black
swan” events (that is, highly
volatile global macroeconomic
occurrences).
Note: This is a trend-related
strategy and works mainly with
up or down trending markets.
Although it can be adapted
to suit ranging markets, as
the underlying principle is to
track market momentum, for FIGURE 3: TAKE-PROFIT LEVELS. Shown here are example buy and sell signals on the chart for the fused-
educational purposes and for channel forex trading strategy. This trade strategy comes with two take-profit (TP) levels. TP1 is set at the
the purposes of this article, opposite end of the execution channel following a successful trade setup. TP2 is set at the opposite end of
the broader channel. A stop-loss is set on the broader channel below the execution channel.
here, I will stick with volatile
market conditions. That said, you would need to apply gaining experience.
the learned principles from this article to other kinds of As you pursue your trading, don’t forget all the col-
market conditions at your time and convenience if that lective wisdoms and adages of good trading: Limit your
is your desire. losses. Always cut your losses and ride your winners. Do
not risk more than 1% per trade, as a practice of good
The fused-channel forex trading money management. Set mental stops. Always conduct
strategy in action proper analysis to determine possible trends or occur-
See Figure 3 for sample buy and sell signals on a chart rences. Always obey your set rules.
for the fused-channel forex trading strategy, as well as I hope this article has served to give you an example
for more description. Following are the trade details for of a trading strategy that you can go try out and poten-
the example trade. tially adopt, as well as providing some context for it
and suggestions for practicing good trading habits when
Instrument: GBP/JPY (buy trade) implementing this, or any other, trading strategy that
Entry level: 127.03 you may choose to adopt or even develop for yourself.
Take profit: TP1 = 131.21. TP2 = 135.71 Good trading!
Stop-loss: 124.20
Entry date: 3/20/2020 Azeez Mustapha is an analyst at Instaforex Companies
Exit date: 4/9/2020 Group and a blogger at Advfn.com, and as well as a
Profit/loss: TP1 = 418 pips; TP2 = 868 pips freelance author for various trading publications. He
Instrument: GBP/JPY (sell trade) is a trading signals provider at some websites. He can
Entry level: 139.93 be reached via email at azeez.mustapha@analytics.
Take profit: TP1 = 136.20; TP2 = 133.09 instaforex.com.
Stop-loss: 142.87 ‡TradingView (‡See Editorial Resource Index)
Entry date: 9/7/2020
Exit date: 9/22/2020
Profit/loss: TP1 = 373 pips. TP2 = 684 pips

Guidelines and tips to always Because this strategy is a long-term

keep in mind trading strategy, trade signals could
Remember, there is more to trading than having a trad- occur infrequently, and thus, trade
ing strategy in hand. You will improve your chances setups should be easy to spot.
for success with good habits, good discipline, testing
your strategies and building confidence in them, and
March 2022 • Technical Analysis of Stocks & Commodities • 41
 ETFs Themed On A Methodology
Investing In DWA-Branded
ETFs: A Market-Beating
Experience?
Rules-based relative strength investing is not new. Its
goal is to outperform its benchmark or a well-known
market index. Dorsey, Wright & Associates has provided
to five ETF sponsors its point-and-figure methodology
using relative strength ranking. How have these DWA-
branded ETFs performed over the past decade and
more recently? Find out in this review of the 28 ETFs
in this category.
In
by Leslie N. Masonson
the February 2022 issue of this magazine,
I interviewed Tom Dorsey, the co-founder
of Dorsey, Wright & Associates (DWA).
I suggest reading that article first, if you
haven’t yet, to provide background on the
firm, its point-and-figure charting approach, and more
importantly, the value and use of relative strength
analysis in security and ETF selection. DWA provides
42 • March 2022 • Technical Analysis of Stocks & Commodities
financial advisors and ETF sponsors with a simple,
easy-to-understand technically based methodology of
stock selection to build stock and ETF portfolios for
their clients without incorporating fundamental analysis.
With respect to the DWA-branded ETFs, each fund’s
objective is to identify the best-performing EFTs or
stocks in the specific universe being analyzed, and then
holding them in the portfolio with reconstitution on a
monthly or quarterly basis to keep the top performers
and eliminate the laggards.
After DWA was founded in 1987, and having great
success in providing quality analytical services to advi-
SITTIPONG PHOKAWATTANA/SHUTTERSTOCK
sors across the country, it was no surprise that firm was
considered a buy-out candidate. Nasdaq’s $225 million
offer was consummated in the first quarter of 2015, as
it was the best-fitting partner, according to Tom Dorsey.
The firm’s name was changed to Nasdaq DWA, but their
operations and management were left untouched.
 WHY TRADE ETFS?

Relative strength explained

Before delving into the details of the DWA-
based ETFs, let’s first review the concept of

WWW.HIGHGROWTHSTOCK.COM
relative strength (RS) and explain how it is
used by investors and traders. First of all,
do not confuse RS with the RSI (relative
strength index), a technical tool. The RSI is
based on comparing a stock to its own price a FIGURE 1: SECTOR SPDRS 12-WEEK RELATIVE STRENGTH. XLRE has led the other
certain number of days ago, so it has nothing sectors over the 12 weeks ending December 17, 2021, whereas XLK and XLE had done
so for at least the prior four 12-week periods.
to do with comparing it to other securities.
Basically, the RS approach buys a basket of
the best-performing equities (stocks and/or
ETFs) from a selected universe (for example,
sectors, Nasdaq 100, large-caps, international,
etc.) that have increased the most in price
over a pre-determined time period. Over the
years, the most common time periods used FIGURE 2: SECTOR SPDRS 26-WEEK RELATIVE STRENGTH. Here you can see the
have been either 3- 6- or 12-month lookbacks strong persistence in 26-week performance for XLK, XLY, and XLRE since October 29,
2021. Doubling the period to view the data smooths it out with fewer bumps.
dependent upon the user’s choice. Most firms
have backtested these and other time periods
and have adapted one of them going forward. Sometimes, for XLK, XLY, and XLRE since October 29, 2021. This
a weighting process is used such as a 50% weight for the is a much smoother performance than illustrated in the
3-month relative strength, 25% for the 6-month RS, and 12-week analysis, and one that is more stable. A 12-month
25% for the 12-month RS, which are all then combined example would show even fewer changes in the rankings
into one RS ranking number. of the top performers, but the overall results for the next
No matter which RS timeframe is used, all the secu- 12 months may not hold up. That means that using a
rities are then ranked in order from highest to lowest 12-month RS period may mask inferior performance that
performer. Then, usually on a monthly or quarterly basis, could have occurred in the most recent months, which
the securities’ performance is ranked again and changes can lead to less-than-stellar results going forward over
are made as necessary, based on the selection criteria the following year.
set up in advance. An example of RS using the SPDR
sectors universe using a 12-week or 3-month period DWA ETF review
is shown in Figure 1, which was obtained from www. With that background on DWA and relative strength, let’s
highgrowthstock.com, a highly recommended analytical review the DWA ETFs available in the marketplace. Over
software platform. the years, five ETF firms have contracted with DWA to
Here we can see that XLRE has gained 9.01% over the offer ETFs with the DWA moniker and strategy. Cur-
past 12 weeks (the setting for 12 weeks cannot be seen) rently, there are 28 ETFs using the DWA methodology
for the week ending December 17, 2021. XLRE is the for security selection. These firms include Invesco (12
top-performing ETF in this sector grouping. In the prior ETFs), First Trust (8), Advisor Shares (6), ArrowShares
week, December 10, over the past 12 weeks it gained (1), and ProShares (1). These ETFs are shown in Figure
4.99%, but it was the second worst performer. Clearly, 3, arranged in order of assets under management (AUM).
XLK, XLE, and XLY were the top three performers in
the weeks prior to December 17 but deteriorated relative
to XLRE in this latest week.
So, even with a 12-week time period, there can be DWA provides financial advisors
drastic changes in rankings. Longer RS periods do not and ETF sponsors with a simple,
have as many changes in leadership but can result in some easy-to-understand technically
deterioration over recent weeks that are not discernible based methodology of stock
if the earlier weeks were very strong. Figure 2 provides selection.
the same analysis but using a 26-week lookback period.
Here you can see the strong persistence in performance
March 2022 • Technical Analysis of Stocks & Commodities • 43
 Inception Expense Av. Daily Percent
Ticker Name AUM Yield Holdings in Beta
Date Ratio Volume Top 10
FV First Trust Dorsey Wright Focus 5 ETF 3/6/2014 $2,890 0.87% 97,667 5 100.55% 1.41
PDP Invesco DWA Momentum ETF 3/1/2007 $1,867 0.62% 72,042 0.32% 100 25.30% 1.37
PTH Invesco DWA Healthcare Momentum ETF 10/12/2006 $397 0.60% 14,855 0.06% 42 46.56% 1.77
PTF Invesco DWA Technology Momentum ETF 10/12/2006 $378 0.60% 21,052 0.11% 36 38.91% 1.74
PRN Invesco DWA Industrials Momentum ETF 10/12/2006 $252 0.60% 22,020 0.51% 42 35.96% 1.38
PIZ Invesco DWA Developed Markets Momentum ETF 12/28/2007 $232 0.80% 32,265 1.02% 100 25.79% 1.12
IFV First Trust Dorsey Wright International Focus 5 ETF 7/22/2014 $229 1.06% 53,890 5 99.95% 1.00
FVC First Trust Dorsey Wright Dynamic Focus 5 ETF 3/18/2016 $221 0.71% 7,509 5 100.54% 1.41
PIE Invesco DWA Emerging Markets Momentum ETF 12/28/2007 $211 0.90% 51,855 1.78% 101 26.47% 1.09
PXI Invesco DWA Energy Momentum ETF 10/12/2006 $161 0.60% 118,707 1.30% 44 34.90% 1.45
DWAW AdvisorShares Dorsey Wright FSM All Cap World ETF 12/26/2019 $153 1.24% 7,374 2 99.88% 1.42
PYZ Invesco DWA Basic Materials Momentum ETF 10/12/2006 $144 0.60% 9,243 1.08% 47 34.34% 1.48
PEZ Invesco DWA Consumer Cyclicals Momentum ETF 10/12/2006 $142 0.60% 17,743 0.76% 38 36.93% 1.57
DALI First Trust Dorsey Wright DALI 1 ETF 5/14/2018 $132 0.91% 14,729 8 0
DVOL First Trust Dorsey Wright Momentum & Low Volatility ETF 9/5/2018 $130 0.60% 15,352 1.34% 50 29.77% 0.92
PFI Invesco DWA Financial Momentum ETF 10/12/2006 $116 0.60% 19,194 2.52% 45 36.20% 1.02
DWUS AdvisorShares Dorsey Wright FSM US Core ETF 12/26/2019 $103 1.10% 2,526 2 99.94% 1.22
PSL Invesco DWA Consumer Staples Momentum ETF 10/12/2006 $101 0.60% 3,423 1.25% 40 38.66% 0.93
DWEQ AdvisorShares Dorsey Wright Alpha Equal Weight ETF 12/26/2019 $85 0.96% 3,366 0.72% 39 30.30% 1.41
AADR AdvisorShares Dorsey Wright ADR ETF 7/20/2010 $76 1.10% 2,520 1.50% 37 38.25% 1.22
DDIV First Trust Dorsey Wright Momentum & Dividend ETF 3/10/2014 $53 0.60% 26,921 3.83% 50 35.00% 1.13
PUI Invesco DWA Utilities Momentum ETF 10/26/2005 $46 0.60% 3,404 2.72% 40 39.42% 0.94
DWSH AdvisorShares Dorsey Wright Short ETF 7/10/2018 $35 3.68% 69,653 1 121.41% 0
DVLU First Trust Dorsey Wright Momentum & Value ETF 9/5/2018 $25 0.60% 8,267 2.12% 50 30.13% 1.19
DWCR Arrow DWA Country Rotation ETF 12/29/2017 $16 1.36% 579 1.76% 89 21.93% 1.12
DWPP First Trust Dorsey Wright People’s Portfolio ETF 8/30/2012 $12 0.60% 2,298 1.26% 500 28.75% 1.00

ETFACTION.COM
DWMC AdvisorShares Dorsey Wright Micro-Cap ETF 7/10/2018 $11 1.27% 2,269 0.98% 161 13.22% 1.08
QQQA ProShares Nasdaq-100 Dorsey Wright Momentum ETF 5/18/2021 $24 0.58% 9,133 0.38% 21 54.65% 1.25
FIGURE 3: DWA ETF COMPARISON. FV and PDP captured the majority of the assets in the category. The remaining ETFs have low daily volumes
and varying focus such as sectors, international, dividends, fewer than 10 holdings, all of which has not produced an outperformance compared to
major averages.

All the data provided in this article, unless otherwise
stated, was obtained from ETFAction.com, which is a
comprehensive ETF website that has been greatly en-
hanced since its founding in 2019.
With 28 ETFs using the DWA methodology with dis-
similar portfolios based on diverse investment universes,
one would expect that a number of these ETFs would
provide better performance than investing in a common
market-cap index fund with a buy-and-hold approach,
since the underlying strategy is based on trend following
and momentum. As you will see in this review, what one
expects to see may not be the case.
As far as AUM, First Trust’s eight DWA-named ETFs
have amassed $3.65 billion with an average expense ratio
of 0.74%; Invesco has gathered a bit more at $3.96 billion
with a dozen ETFs. They offer a lower average expense
ratio of 0.64%. AdvisorShares offers six ETFs with only
44 • March 2022 • Technical Analysis of Stocks & Commodities
$455 million in AUM with a high average expense ratio
of 1.56%, not surprising as three of their five ETFs are
relatively young with late December 2019 inception dates
and two others have a July 2018 starting date.
The common features of all the ETFs listed in Fig-
ure 3 include: listed on Nasdaq exchange; open-ended;
Basically, the relative strength
approach buys a basket of the
best-performing equities from
a selected universe that have
increased the most in price over
a pre-determined time period.
equity-based (except DALI Ticker 1yr Perf 3yr Perf 5yr Perf to Invesco data, the fund has
10yr Perf
which is multi-asset); long only AADR 6.29% 14.17% 10.11% 9.31% returned 9.82% since inception
(except for DWSH which is an DWMC 32.93% 22.54% through September 30, 2021,
inverse ETF); passively man- DWAW 1.75% compared to the benchmark
aged (except for AdvisorShares DWUS 17.95% return of 13.04%. Currently, it
which are all actively managed); DWSH −22.80% −33.05% is composed of 81% large-caps
mostly US focused; and mostly DWEQ 0.54% with 19% in mid-caps. Informa-
quarterly dividends (except for DWCR 17.67% 13.70%
tion technology accounts for
annual dividends from DWAQ, DDIV 37.24% 18.04% 10.43%
34% of the portfolio followed by
DWUS, DWEQ, and DWMC). DVOL 28.89% 19.23%
healthcare at 24% and consumer
Note that DWA is also the sub- DVLU 39.74% 16.47%
discretionary at 14.7%.
advisor of these last four ETFs, IFV 5.23% 10.92% 8.30%
Year to date, the substantial
as well as for AADR, but for no outflows of $607 million are
FV 19.17% 22.22% 15.74%
other ETFs listed here. not a healthy sign for PDP. This
FVC 19.10% 14.92% 11.49%
is not surprising in light of its
DALI 19.20% 13.79%
Invesco DWA ETFs disappointing 5.12% one-year
DWPP 24.67% 9.61% 8.73%
Invesco was the pioneer in of- performance, which pales in
fering the first DWA-labeled comparison to the NASDAQ’s
PYZ 30.87% 20.08% 9.50% 12.58%

ETF known as Invesco DWA 25.9% return and S&P 500 re-
PEZ 16.08% 21.80% 15.50% 14.05%

Utilities Momentum ETF (PUI) turn of 27.8%. Also, over the last
PSL 4.96% 9.28% 11.38% 12.68%

that was launched on October PIZ 17.66% 19.83% 14.26% 10.35%

3-, 5-, and 10-year periods it has
26, 2005. About a year later, PIE 16.49% 18.60% 13.41% 6.36%
not outpaced those two indexes
Invesco came out with eight PXI 64.62% 1.29% −6.28% −0.81%
and was about two percentage
DWA sector ETFs, followed by PFI 27.36% 23.79% 13.32% 13.48%
points below that of the S&P 500
a developed markets (PIZ) and PTH −8.47% 24.08% 24.24% 18.21%
for those three time periods.
emerging markets (PIE) ETF PRN 27.22% 29.50% 18.02% 16.22% PDP has a standard deviation
in December 2007. Since then. PDP 5.12% 22.08% 16.59% 14.89% of 18.8% compared to 18.4% for
Invesco has not originated any PTF 13.48% 41.85% 31.09% 21.33% the S&P 500 index and a beta
other DWA ETFs. PUI 13.85% 6.66% 9.12% 11.17% of 0.94. This ETF is reconsti-
Of the 12 ETFs, nine are sec- QQQA N.A. tuted quarterly. In summary,
tor funds with a total AUM of Narket Indices its performance has not kept
$1.33 billion and a 0.60% annual QQQ 25.87% 34.81% 27.39% 22.75% pace with its benchmark or the
expense ratio. They compete SPY 27.80% 23.56% 17.69% 16.57% major indexes. That means that
with 828 other sector ETFs in FIGURE 4: DWA ETF PERFORMANCE COMPARISON. The the DWA methodology has not
the marketplace, according to market indexes outperformed all these ETFs except in a few added much value on the upside
ETFAction.com. Since these cases. Over 10 years, the indexes prevailed in performance or much protection against the
100% of the time.
Invesco sector ETFs are not the downside as it is always 100%
top-performing ones in their sector categories, it is no invested in equities and never goes to cash.
surprise that their asset growth has not increased much Their three best-performing Invesco DWA-focused
if at all over the years. One exception is PXI, which ETFs—PTF, PRN, and PTH, respectively—are all sector-
has amassed $133 million in the past year, since it is in related, covering technology, industrials, and healthcare
the hot energy sector. Over five years though, it had net in that order (Figure 4). All three have outpaced the two
outflows of $7 million, since the energy space did not major indexes in all timeframes. However, PTH has
perform well until this past year. drastically underperformed in the past year with a 8.47%
PDP, the Invesco momentum ETF, is clearly their AUM loss. Clearly, the DWA sector strategy failed miserably
trailblazer with $1.9 billion in AUM, which translates to recently but has had much better longer-term results. This
76% of their DWA ETF assets. This ETF tracks the Dorsey recent poor performance is most likely what led to its
Wright Technical Leaders Index (100 large- and mid-cap substantial cash outflows of $511 million year to date.
stocks weighted by a proprietary relative strength ranking
system). Since its inception, PDP has not performed as First Trust DWA ETFs
well as its NASDAQ US benchmark index. According Although Invesco had an eight-year head start in of-
March 2022 • Technical Analysis of Stocks & Commodities • 45
 fering DWA-focused ETFs compared to First Trust, it
has amassed $350 million less in assets totaling $3.65
billion. That is a certainly an impressive performance
and indicates their marketing power.
Their first ETF in their DWA space was the First Trust
Dorsey Wright People’s Portfolio (DWPP) established in
August 2012, but it has gathered a paltry $12 million in
assets, clearly not a barn burner. Cash flows have been
down for the last three years, but up $11 million over five
years. DWPP gained 25% this past year, but returned
less than 10% over three and five years, making it a
laggard among the group and among the major indexes
by 600 to 900 basis points. This ETF allocates money
to the best relative strength performers in the Nasdaq
US Large Cap Index or Equal Weight Index or the First
Trust Enhanced Short Maturity ETF (FTSM).
The default is FTSM if it has a higher relative strength
than securities in the other two indexes. The relative
strength is analyzed on a daily basis, which typically
can result in higher portfolio turnover. Supposedly, the
ability to go to the fixed-income option should bolster its
performance in corrections like February to March 23,
2020, but that did not occur, most likely due to the speed
of the decline and the recovery, where even the daily RS
analysis was not fast enough to avert the decline.
The First Trust Dorsey Wright Focus 5 ETF (FV) was
launched on March 6, 2014 with a substantial $2.90 bil-
lion in assets, accounting for 77.5% of the total of their
eight ETFs in the DWA category, so it is the behemoth
for them, as well as the largest asset gatherer among all
DWA-labeled ETFs evaluated here.
FV’s goal is to replicate the price and yield of the
Dorsey Wright Focus Five Index, whose purpose is to
provide targeted access to five First Trust sector- and
industry-based ETFs that offer the highest probability
to outperform the other ETFs in that universe, as well as
satisfy trading volume and liquidity prerequisites. This
is basically a sector rotation portfolio with five ETFs in
the portfolio at all times.
The sector and industry ETFs are compared with
each other to determine the highest-ranking one based
No matter which relative
strength timeframe is used,
all the securities are then
ranked in order from highest
to lowest performer.
46 • March 2022 • Technical Analysis of Stocks & Commodities
ETF Percent
First Trust Industrials/Producer Durables AlphaDEX® Fund 20.47%
First Trust Nasdaq Transportation ETF 20.24%
First Trust NASDAQ-100-Technology Sector Index Fund 20.16%
First Trust Consumer Discretionary AlphaDEX® Fund 20.14%
First Trust Nasdaq Oil & Gas ETF 19.53%
FIGURE 5: CURRENT FV HOLDINGS. FV’s portfolio contains five First
Trust ETFs selected based on relative strength and equally weighted. This
ETF has garnered the most assets in the category while its performance
is average for the group.
on price momentum. This relative strength analysis is
performed bi-monthly, and ETFs are replaced when their
ETF relative strength ranking falls compared to all the
others. The index is also rebalanced; however, each the
five ETFs is equally weighted. FV has gained an annual-
ized 15.74% in five years, while increasing 19.2% over
the past year. This is two percentage points lower than
the S&P 500 over five years and 8.7 percentage points
lower over the past year, so FV’s performance results
are unexceptional.
Surprisingly, after a bulge in assets when it first appeared,
it has had a $1.25 billion cash outflow over five years, as
well as a cash outflow of $600 million over three years,
both the largest outflows of the ETFs reviewed here. The
minimal inflow of $33 million over one year is not impres-
sive. The current FV holdings are provided in Figure 5.
First Trust Dorsey Wright Dynamic Focus 5 ETF
(FVC) was established in March 2016, two years after
FV. It is similar to FV in all respects, except that First
Trust Enhanced Short Maturity (FTSM) is added as an
option when more than 33% of the universe of First Trust
ETFs experiences relative strength below that of FTSM.
FTSM may actually constitute 0 to 95% of the portfolio,
but no more than 33% can be added or deleted at each of
the bi-monthly evaluation periods. This ETF has $221
million in assets. FVC has performed equally to FV over
one year, but it performed 7 percentage points worse over
three years and 4.25 percentage points worse over five
years. So it appears the addition of FTSM into the mix
has not improved performance relative to FV. Just like
the addition of FTSM to the FV strategy, its addition to
FVC has not led to a defensive performance during the
market decline in early 2020.
First Trust Dorsey Trust DALI 1 ETF (DALI) was born
on May 14, 2018 with comparable performance results
to FVC over the one- and three-year periods with AUM
at $132 million and an expense ratio of 0.91%. In the
case of DALI, the universe is composed of three asset
classes: US and international equities, and commodities.
Bi-weekly relative strength analysis is used to select the

FIGURE 6: FIRST TRUST DWA PERFORMANCE VERSUS SPY. Clearly, not one of the ETFs has outperformed the SPY on a buy-and-hold basis
since the common date of September 7, 2018. This performance mirrors the underperformance of the other 20 DWA ETFs.
top performers in each class. Currently, there are eight
First Trust ETFs in the portfolio including: FTC, FYC,
FXR, FTXR, QTEC, FXD, and FTXN.
Portfolio weighting of the three asset classes are rebal-
anced quarterly. Its daily trading volume is 14,700, which
is miniscule. This ETF’s strategy has more moving parts
than the other First Trust DWA offerings, but it has neither
outperformed FV nor FVC, so its addition to the DWA
lineup did not add a “star” performer. Surprisingly, as far
as flows are concerned, DALI has captured a significant
$101 million over the past year and $124 million over
five years, which is the second-highest inflows for one
year, and the highest for five years among the 28 ETFs
reviewed here.
First Trust Dorsey Wright International Focus 5 ETF
(IFV) has captured $229 million in assets, but has been
bleeding cash since its inception in July 2014. As the name
implies, there are only five ETFs in this portfolio drawn
from the First Trust universe based on DWA’s standard
relative strength analysis. Current daily share volume is
54,000 with an annual expense ratio of 1.06%.
Over five years, cash outflows have been $191 million
and have continued to be negative over more recent years.
This cash flow drain is not surprising considering its poor
performance over the five-year period with a gain of 8.3%
and 5.23% over the past year. Clearly, international stocks
have underperformed US equities, which is apparent in
the performance data. From August 17, 2001 to October
21, 2007, international stocks represented by the iShares
MSCI EAFE ETF (EFA) more than doubled the S&P
500 performance of 47% with a gain of 124%, while the
iShares MSCI Emerging Markets ETF (EEM) advanced
386%. But since then, the S&P 500 is up 321% compared
to 50% for EFA and 29% for EEM through December
27, 2021. From the March 23, 2020 low, the S&P 500 has
advanced 117% thorough December 23, 2021 compared
STOCKCHARTS.COM
to 78% for EFA and 65% for EEM.
The First Trust Dorsey Wright Momentum & Divi-
dend ETF (DDIV) and the First Trust Dorsey Wright
Momentum & Value ETF (DVLU) having March 2014
and September 2014 inception dates, respectively, fol-
low the standard relative strength protocol in selecting
securities. With $53 million and $25 million in assets,
they both are among the weakest asset gatherers in the
group reviewed here. DDIV pulled in $16 million in the
past one and three years, while DVLU has only managed
to grab $8 million in that timeframe.
DDIV maintains 50 securities in its portfolio and has
a low 27,000 average daily share volume. Thirty-five
percent of the assets are in the top 10 stocks. DVLU also
maintains 50 securities in its portfolio, and has a very
low 8,300 average daily share volume. Thirty percent
of the assets are in the top 10 stocks.
On the plus side, DDIV has a 37.2% one-year per-
formance, and DVLU did even better at 39.7%, both
exceeding the major indexes by at least 10 percentage
points and being the second- and third-best performers
among the 28 ETFs in one-year performance. However,
over three years, they both underperformed the S&P 500
by 5 to 7 percentage points. So it appears that the most
recent year’s performance could be a positive outlier.
AdvisorShares offers six DWA-
branded ETFs with $452 million in
AUM. Moreover, all these funds
are sub-advised by DWA, which is
not the case with any of the other
22 ETFs evaluated here.
March 2022 • Technical Analysis of Stocks & Commodities • 47
 Whether this exceptional performance will continue is
anyone’s guess.
The remaining ETF in the First Trust DWA complex is
the First Trust Dorsey Wright Momentum & Low Volatility
ETF (DVOL). This ETF was introduced in September 2018
and holds $130 million in assets. It contains 50 securities
in its portfolio and has a low 15,000 average daily trading
volume. Thirty percent of the ETF is invested in the top
10 stocks. Over one year, its performance exceeded the
S&P 500 by one percentage point, but over three years it
was short by 4.25 percentage points. Cashflow-wise, it has
lost $23 million in assets over one year but has pulled in
$69 million over three years.
Figure 6 shows the performance of all the First Trust
DWA ETFs compared to the SPY. Clearly, none of the
ETFs have performed better than the S&P 500 since the
common date of September 7, 2018 through December
23, 2021, even though a rules-based relative strength
strategy was used. It is apparent that the DWA strategy
has not provided a performance enhancement to inves-
tors over a standard benchmark (SPY), which has a lower
expense ratio of 0.09% and a huge daily trading volume
of 65.5 million shares.
AdvisorShares DWA ETFs
AdvisorShares offers six DWA-branded ETFs with
$452 million in AUM. Moreover, all these funds are
sub-advised by DWA, which is not the case with any
of the other 22 ETFs evaluated here. AADR, their first
DWA-labeled ETF, came out in July 2010 but has been
able to amass only $76 million in assets. This is not a
very good showing for a decade of survival. Remarkably,
their next DWA offerings did not appear until July 2018
(DWSH and DWMC) and December 2019 (DWAW,
DWUS, and DWEQ).
AdvisorShares Dorsey Wright ADR ETF (AADR) has a
1.10% expense ratio and a miniscule daily trading volume
of 2,500 shares. Its portfolio contains 37 stocks with the
top 10 accounting for 38% of the portfolio. AADR had
the fourth-worst one-year performance of the group at
These ETFs have elevated
annual expense ratios,
significantly less trading volume
and liquidity, larger bid-ask
spreads, and in most cases
minimal or negative cashflows.
48 • March 2022 • Technical Analysis of Stocks & Commodities
6.29%, and the 14.17% three-year performance was 10
percentage points lower than the performance of the S&P
500 index. Moreover, the 5- and 10-year performance
was 7 to 10 points lower than the S&P 500, respectively.
In summary, this ETF is one that offers no advantages
over a plain-vanilla index.
AdvisorShares Dorsey Wright FSM All Cap World ETF
(DWAW) has the largest amount of assets of the six with
$153 million. This ETF uses a fund-of-funds approach,
is global in scope, and also focuses on factors, market
caps, and styles. Current holdings include only QQQM
and RPG (Invesco S&P 500 Pure Growth ETF), both
at a 50% weighting. It has a 1.24% expense ratio with a
short track record of two years, where it gained 1.75% in
the past year, which is 25 percentage points worse than
the S&P 500. Daily volume of 7400 is extremely low.
Overall, this ETF has had a disappointing life, except
for its initial asset-gathering success. Over the past year
it has captured $17 million is assets, so it has retained
its assets very well, which is surprising considering its
poor performance.
AdvisorShares Dorsey Wright FSM US Core ETF
(DWUS) was born on December 26, 2019 with a focus
on large-cap growth stocks based in North America,
and has a 1.10% expense ratio. Current AUM totals
$103 million, which is $50 million less than DWAW
with the identical birthdate. It has cash inflows of $17
million over one year, which matches that of DWAW. Its
one-year performance of 17.95% is 10 percentage points
less than the S&P’s. This is another average performer
with 9,200 daily share volume and a portfolio of two
equally weighted ETFs—QQQ and RSP (Invesco S&P
500 Equal Weight ETF).
AdvisorShares Dorsey Wright Micro-Cap ETF
(DWMC) with a mid-2018 birth date aggregated only
$11 million in assets, the lowest of all the 28 ETFs here
and a 1.27% expense ratio. Interestingly, its one-year
performance of 33% was fourth best among the group,
as well as five percentage points greater than the S&P
500 performance. Moreover, over three years, its 22.5%
performance was only one percent worse than the S&P
500. So it is surprising that assets have not grown since
inception but are up $8 million in one year. Its average
daily volume of 2,300 shares is almost nonexistent. The
portfolio contains 161 securities.
AdvisorShares Dorsey Wright Alpha Equal Weight
ETF (DWEQ) has $85 million is assets with a 0.96%
expense ratio. The portfolio contains 39 securities. Its
dismal one-year performance of 0.54% was the worst
of all, except for that of the inverse DWSH ETF. Asset
inflows for the past year of $12 million were surprising
based on its weak performance. Its average daily volume
of 3,400 shares is almost nonexistent.
On the flip side, not unexpectedly, their AdvisorShares
Dorsey Wright Short ETF ( DWSH) inverse ETF with
an inception date of July 2018 and AUM of $35 million
has taken a drubbing with a loss of 33% over three years
and 23% over the past year, as the markets have soared.
Flows over the past one year have been $3 million.
Moreover, there are at least 210 competing inverse ETFs
in the marketplace, which is one reason for the low $35
million in assets. Another reason is its extremely high
3.58% expense ratio. Overall, this an ETF to avoid.
Arrow DWA Country Rotation ETF (DWCR)
This ETF has collected an unimpressive $16 million
in AUM since its December 2017 launch. The expense
ratio is 1.36% with a portfolio containing 89 securities.
The average daily volume of 579 is almost nil. Over one
year, it has earned 17.7%, 10 percentage points worse than
the S&P 500, and over three years has returned 14.2%
annualized, 9.5 percentage points below the S&P 500.
Flows over the past one year have been $2 million. With
international out of favor, no wonder its performance and
asset gathering are not working well.
ProShares Nasdaq-100 Dorsey Wright Momentum
ETF (QQQA)
Since it already had 140 ETFs with $70 billion in AUM,
it is surprising that ProShares decided to add a DWA-
focused ETF, given that there were 27 others in the cat-
egory from their competitors. Nevertheless, with its May
18, 2021 inception, this ETF has gathered $24 million in
AUM with an accompanying 0.58% expense ratio. This
portfolio contains 21 securities with an average daily
volume of 9,000. The DWA relative strength strategy
is used to select the highest-performing stocks based
on price appreciation in the NASDAQ-100 index. Since
its inception through December 27, 2021, QQQA has
gained 12.9% compared to 25.5% for the NASDAQ-100
(QQQ), certainly not an impressive start. This portfolio
is reconstituted in January, April, July, and October with
the weightings changing at those dates.
Conclusions
Based on my review of these 28 DWA-branded ETF,
I have concluded that they do not offer any advantage
to investors over a simple buy-and-hold strategy of one
of the major indexes such as the S&P 500 or Nasdaq
Composite. Moreover, traders will not find these ETFs
useful given their low volatility and low trading volume.
This dual result is disappointing, as I was expecting
better performance from a rules-based relative strength
strategy that encompasses momentum and trend follow-
ing. Based on the performance data, the bottom line is
that the DWA strategy used in an ETF wrapper does not
add any value, even though 13 of these ETFs have been
available for a decade.
In addition to their underperformance, these ETFs have
elevated annual expense ratios, significantly less trading
volume and liquidity, larger bid-ask spreads, and in most
cases minimal or negative cashflows. Those with AUM
of less than $100 million, and especially those with less
than $25 million face an uncertain future. Only FV and
PDP have greater than $1 billion in AUM, while the
remainder have AUM less than $400 million, and 10
have less than $100 million in AUM. PXI trades 118,000
daily shares, the only one above 100,000 shares in this
review. But PXI has the worst performance, losing 1%
over ten years. Overall, I recommend steering clear of
this special class of momentum ETFs.
S&C Contributing Writer and ETF Columnist Leslie N.
Masonson is president of Cash Management Resources,
a firm focusing on ETF strategies. He is an active NAS-
DAQ futures and ETF trader, and the author of six books
including Buy—Don’t Hold: Investing With ETFs Using
Relative Strength To Increase Returns With Less Risk,
and All About Market Timing, as well as Day Trading
On The Edge. He can be reached at lesmasonson@
yahoo.com.
• www.etfaction.com • www.advisorshares.com • www.
arrowfunds.com • www.ftportfolios.com • www.invesco.
com • www.proshares.com
Further reading
Dorsey, Thomas J. [2013]. Point And Figure Charting: The
Essential Application For Forecasting And Tracking
Market Prices, 4th ed., Wiley Trading Series.
Masonson, Leslie N. [2022]. “A Conversation With Tom
Dorsey,” Technical Analysis of Stocks & Commodi-
ties, Volume 40: February.
The DWA relative strength
strategy is used to select the
highest-performing stocks
based on price appreciation.
March 2022 • Technical Analysis of Stocks & Commodities • 49
 The focus of Traders’ Tips this
month is Vitali Apirine’s article
in this issue, “Relative Strength
Moving Averages, Part 3.” Here,
we present the February 2022
Traders’ Tips code with possi-
ble implementations in various
software.
The code for the following
Traders’ Tips selections is post-
ed here:
• Traders.com → S&C Magazine →
Traders’ Tips
At Traders.com you can also right-click on any
chart to open it in a new tab or window and view
the chart at a much larger size.
The Traders’ Tips section is provided to help read-
ers implement a selected technique from an article in
this issue or another recent issue. The entries here
are contributed by software developers or program-
mers for software that is capable of customization.

F TRADESTATION: MARCH 2022 TRADERS’ TIPS CODE
The current article series “Relative Strength Moving Averages”
by Vitali Apirine focuses on differences between traditional
exponential moving averages (EMAs) and relative strength-
based EMA indicators. In this issue's article, Apirine describes
the relative strength volatility-adjusted exponential moving
average (RS VolatAdj EMA).
The indicator is designed to account for relative strength
of volatility, and it requires a second, corresponding volatil-
ity index. For example, if charting the S&P 500 ETF (SPY),
one can use the CBOE Volatility Index ($VIX.X). The indi-
cator compared to itself of varying lengths, or the indicator
compared to a traditional EMA with the same length, can be
used to help to identify trends and turning points. During an
uptrend, RS VolatAdj EMA crossovers can be used to help
identify entry points for long trades.
Indicator: TASC MAR 2022 RS VolatAdj EMA
// TASC MAR 2022
// Relative StrengthMoving Averages
// Part 3: The Relative Strength Volatility-Adjusted
// Exponential Moving Average (RS VolatAdj EMA)
//
// Vitali Apirine 2022
RS = AbsValue(XAverage(VolatUpDay, Pds) -
XAverage(VolatDwnDay, Pds)) / (XAverage(VolatUpDay,
Pds) +
XAverage(VolatDwnDay, Pds) + 0.00001);
RS = RS * Mltp;
Rate = Mltp1 * (1 + RS);
If CurrentBar = Periods + 1 then
PlotValue = Close
else
PlotValue = PlotValue[1] + Rate * (Close - PlotValue[1]);
if CurrentBar >= Periods + 1 then
Plot1( PlotValue, "RS VolatAdj" );
A sample chart is shown in Figure 1.
This article is for informational purposes. No type of
trading or investment recommendation, advice, or strategy
is being made, given, or in any manner provided by TradeS-
tation Securities or its affiliates.
—John Robinson
TradeStation Securities, Inc.
www.TradeStation.com

inputs:
int Periods( 10 ),
int Pds( 10 ),
int Mltp( 10 );

variables:
Mltp1( 0 ),
VolatC( 0, Data2 ),
VolatUpDay( 0 ),
VolatDwnDay( 0 ),
Rate( 0 ),
RS( 0 ),
PlotValue( 0 );

Mltp1 = 2 / (Periods + 1); FIGURE 1: TRADESTATION. Shown is a TradeStation daily chart of the S&P 500
VolatC = Close of Data2; ETF (SPY) and the CBOE Volatility Index ($VIX.X) with the indicator applied. Indica-
VolatUpDay = IFF(Close > Close[1], VolatC, 0); tor inputs have been set to 50, 50 and 10. A traditional 50-period EMA is also plotted
VolatDwnDay = IFF(C < Close[1], VolatC, 0); (shown in red).

50 • March 2022 • Technical Analysis of Stocks & Commodities


FIGURE 2: ESIGNAL. Here is an example of the study plotted on a daily chart of
$SPX. This study displays the relative strength of volatility as an exponential moving
average.
F eSIGNAL: MARCH 2022 TRADERS’ TIPS CODE
For this month’s Traders’ Tip, we’ve provided the study RS
VolatAdj.efs based on the article by Vitali Apirine in this issue,
“Relative Strength Moving Averages, Part 3: The Relative
Strength Volatility-Adjusted Exponential Moving Average (RS
VolatAdj EMA).” This study displays the relative strength of
volatility as an exponential moving average.
The study contains formula parameters that may be con-
figured through the edit chart window (right-click on the
chart and select “edit chart”). A sample chart is shown in
Figure 2.
To discuss this study or download a complete copy of the
formula code, please visit the EFS library discussion board
forum under the forums link from the support menu at www.
esignal.com or visit our EFS KnowledgeBase at www.esig-
nal.com/support/kb/efs. The eSignal formula script (EFS) is
also available for copying & pasting from this magazine’s
website at Traders.com in the Traders’ Tips section.
—Eric Lippert
eSignal, an Intercontinental Exchange, Inc. company
770-999-4511, www.eSignal.com
F WEALTH-LAB: MARCH 2022 TRADERS’ TIPS CODE
The relative strength volatility-adjusted exponential moving
average (RSVolatAdjEMA), an indicator introduced in Vitali
Apirine’s article in this issue, “Relative Strength Moving
Averages, Part 3: The Relative Strength Volatility-Adjusted
Exponential Moving Average (RS VolatAdj EMA),” has
been added to Wealth-Lab 7. It opens up for including it in
FIGURE 3: WEALTH-LAB. This example trading system using crossovers of the
relative strength volatility-adjusted exponential moving average (RSVolatAdjEMA)
was created in under a minute by using Wealth-Lab’s Building Blocks feature to set
up the strategy.
FIGURE 4: WEALTH-LAB. This chart shows sample trades taken by the system
applied to a daily chart of SPY.
your research without any programming. For example, the
indicator could be used as a basis for building and training
a backpropagation neural network or tested in the Indicator
Profiler extension to see how much of an edge it provides
compared to other indicators.
And of course it’s a snap to build a trading system from
within Building Blocks. Figure 3 illustrates one such system
derived from an idea mentioned in the article. The blocks use
the RSVolatAdjEMA crossovers as entry points for trades
during a long-term uptrend. We entered the symbol ^VIX to
get the VIX data from Yahoo! Finance but you can take any
other supported data source.
The rules of the sample system are:
• Buy when RSVolatAdjEMA(50,50,10) crosses above
RSVolatAdjEMA(200,200,10)
• Sell when RSVolatAdjEMA(50,50,10) crosses below
RSVolatAdjEMA(200,200,10)
Alternatively, the same rules can be applied as a trend di-
rection filter in a custom trading system. (See Figure 4.)
using WealthLab.Backtest;
using WealthLab.Core;
using WealthLab.Indicators;
using System.Drawing;
using WealthLab.TASC;
namespace WealthScript1
{
public class S_C_2022_03__RelativeStrengthMovin-
March 2022 • Technical Analysis of Stocks & Commodities • 51
 gAveragesPart3 : UserStrategyBase
{
public override void Initialize( BarHistory bars)
{
rsv1 = new RSVolatAdjEMA(bars,"^VIX",50,50,10);
rsv2 = new RSVolatAdjEMA(bars,"^VIX",200,200,10)
;

PlotIndicator( rsv1,Color.FromArgb(255,0,0,0));
PlotIndicator( rsv2,Color.FromArgb(255,0,0,255));

StartIndex = 200;
}

public override void Execute( BarHistory bars, int

idx)
{
if (LastPosition == null)
{
if (rsv1.CrossesOver(rsv2, idx))
PlaceTrade( bars, TransactionType.Buy, Or- FIGURE 5: NINJATRADER. The RSVolatAdjEMA indicator is displayed here on a
derType.Market, 0, 0, "Crossover"); daily S&P 500 index chart from August 2020 to December 2020.
}
else
{ by selecting the menu New → NinjaScript Editor → Indica-
if (rsv1.CrossesUnder(rsv2, idx)) tors folder from within the control center window and select-
ClosePosition( LastPosition, OrderType.Mar- ing the RSVolatAdjEMA file. You can review the indicator’s
ket, 0, "Crossunder");
} source code in NinjaTrader 7 by selecting the menu Tools →
} Edit NinjaScript → Strategy from within the control center
window and selecting the RSVolatAdjEMA file.
private IndicatorBase rsv1, rsv2; A sample chart displaying the RSVolatAdjEMA indicator
} is shown in Figure 5.
}
NinjaScript uses compiled DLLs that run native, not in-
—Gene Geren (Eugene) terpreted, to provide you with the highest performance pos-
Wealth-Lab team sible.
www.wealth-lab.com —Chris Lauber
NinjaTrader, LLC
www.ninjatrader.com

F NINJATRADER: MARCH 2022 TRADERS’ TIPS CODE

The RS VolatAdj EMA indicator, which is presented in Vitali
Apirine’s article in this issue, “Relative Strength Moving
Averages, Part 3: The Relative Strength Volatility-Adjusted
Exponential Moving Average (RS VolatAdj EMA),” is avail-
able for download at the following links for NinjaTrader 8
and for NinjaTrader 7:
F TRADINGVIEW: MARCH 2022 TRADERS’ TIPS CODE
Here is the TradingView Pine Script code implementing the
relative strength volatility-adjusted exponential moving aver-
age (RS VolatAdj EMA). This indicator is presented in the
article in this issue by Vitali Apirine.

NinjaTrader 8: // TASC Issue: March 2022 - Vol. 40, Issue 3

www.ninjatrader.com/SC/March2022SCNT8.zip // Article: Relative Strength Moving Averages -
NinjaTrader 7: // Part 3: The Relative Strength
www.ninjatrader.com/SC/March2022SCNT7.zip // Volatility-Adjusted
// Exponential Moving Average
// (RS VolatAdj EMA)
Once the file is downloaded, you can import the indicator // Article By: Vitali Apirine
into NinjaTader 8 from within the control center by selecting // Language: TradingView's Pine Script v5
Tools → Import → NinjaScript Add-On and then selecting // Provided By: PineCoders, for tradingview.com
the downloaded file for NinjaTrader 8. To import into Ninja-
Trader 7, from within the control center window, select the //@version=5
indicator("TASC 2022.03 RS VolatAdj EMA", "RSVAEMA",
menu File → Utilities → Import NinjaScript and select the true)
downloaded file.
You can review the indicator source code in NinjaTrader 8 selVIX = input.symbol("TVC:VIX", "VIX Selection")

52 • March 2022 • Technical Analysis of Stocks & Commodities

FIGURE 6: TRADINGVIEW. Shown here is the RS VolatAdj EMA on a chart of the FIGURE 7: NEUROSHELL TRADER. This NeuroShell Trader chart shows the SPX
S&P 500 index. relative strength volatility-adjusted exponential moving average (RS VolatAdj EMA).

source = input.source( close, "Source") CodersTASC account:

perEMA = input.int ( 20, "EMA Period") https://www.tradingview.com/u/PineCodersTASC/#pub​
perVS = input.int ( 20, "Volatility Strength Period")
lished-scripts
multVS = input.float ( 10.0, "Multiplier")
—PineCoders, for TradingView
// Relative Strength Volatility-Adjusted EMA Function www.TradingView.com
rsvae(source, srcVIX, periodEMA, periodVolatS, multVol-
atS) =>
var MULT = 2.0 / (math.max(1.0, periodEMA) + 1.0)
var ALPH = 2.0 / (math.max(1.0, periodVolatS) + 1.0) F NEUROSHELL TRADER: MARCH 2022 TRAD-
var BETA = 1.0 - ALPH ERS’ TIPS CODE
volatUp = source > nz(source[1], source) ? srcVIX :
0.0
The relative strength volatility-adjusted exponential
volatDown = source < nz(source[1], source) ? srcVIX : moving average (RS VolatAdj EMA), which is introduced in
0.0 Vitali Apirine’s article in this issue, can be easily implemented
volatUpEMA = float(na) in NeuroShell Trader by combining some of NeuroShell
volatUpEMA := volatUp * ALPH + Trader’s 800+ indicators.
nz(volatUpEMA[1], volatUp) * BETA
volatDnEMA = float(na)
To implement the indicators, select new indicator from
volatDnEMA := volatDown * ALPH + the insert menu and use the indicator wizard to create the
nz(volatDnEMA[1], volatDown) * BETA following indicators:
VolatS = nz(math.abs(volatUpEMA - volatDnEMA) /
(volatUpEMA + volatDnEMA)) UVEMA: ExpAvg( IfThenElse( A>B( Momentum(Close,
rsVolatAdjEMA = source 1), 0 ), VIX, 0 ), 10)
lastRSVAE = nz(rsVolatAdjEMA[1], rsVolatAdjEMA) DVEMA: ExpAvg( IfThenElse( A<B( Momentum(Close,
rsVolatAdjEMA := lastRSVAE + (source - lastRSVAE) * 1), 0 ), VIX, 0 ), 10)
MULT * RS:  Divide( Abs( Subtract(UVEMA , DVEMA ) ),
(1.0 + VolatS * math.max(0.0, multVolatS)) Add2(UVEMA , DVEMA) )
rsVolatAdjEMA RATE: Multiply2( Add2(1, Multiply(RS, 10) ), Divide( 2,
Add2(10, 1) ) )
VIXvalue = request.security(selVIX, timeframe.period, RSVolatAdjEMA: DynamicExpAvg (Close, RATE )
close)
NeuroShell Trader users can go to the Stocks & Com-
RSvolatAdjEMA = rsvae(source, VIXvalue, perEMA, modities section of the NeuroShell Trader free technical
perVS, multVS)
EMA = ta.ema(source, perEMA)
support website to download a copy of this or any previous
fillColor = RSvolatAdjEMA > EMA ? #FF8C0033 : Traders’ Tips.
#2096F233 The DynamicExpAvg is a dynamic rate exponential mov-
ing average custom indicator that is also available for down-
plotEMA = plot(EMA) load at our free technical support website at NeuroShell.
plotRSVAE = plot(RSvolatAdjEMA, "", #ff8c00, 2)
fill(plotEMA, plotRSVAE, color=fillColor)
com.
—Ward Systems Group, Inc.
sales@wardsystems.com
The indicator is available on TradingView from the Pine-
www.neuroshell.com

March 2022 • Technical Analysis of Stocks & Commodities • 53

 FIGURE 8: OPTUMA. This weekly chart of the S&P 500 shows crossovers of the
RS VolatAdj EMA.

F OPTUMA: MARCH 2022 TRADERS’ TIPS CODE

In his article in this issue, Vitali Apirine presents the relative FIGURE 9: TRADERSSTUDIO. The RSVEMA indicators (10- and 50-bar) are shown
strength volatility-adjusted exponential moving average (RS on a chart of Amgen (AMGN) during part of 2013.
VolatAdj EMA). Following is a formula to use in Optuma for
EMA(10,10,10): Function RSVEMA: Computes the volatility adjusted
VolatC = GETDATA(CODE=VIX:CBOEI); relative strength exponential moving average
$PDS = 10; Indicator plot RSVEMA_IND: Plots the RSVEMA in-
Periods = 10; dicator on a chart
Mltp = 10;
Mltp1 = 2/(Periods + 1); Code:
//MA(BARS=$PDS, STYLE=Exponential, CALC=Close) 'Relative Strength Moving Average, Volatility Adjusted
'Author: Vitali Apirine, TASC March 2022
VolatUpDay = IF(Close() IsUp, VolatC,0); 'Coded by: Richard Denning, 1/10/2022
VolatDwnDay = IF(Close() IsDown, VolatC,0);
'FUNCTION TO COMPUTE INDICATOR VALUES:
RS=ABS(MA(VolatUpDay, BARS=$PDS, Function RSVEMA(Periods, Pds, Mltp)
STYLE=Exponential) - MA(VolatDwnDay, BARS=$PDS, 'Periods = 10, Pds = 10, Mltp = 10
STYLE=Exponential)) / (MA(VolatUpDay, BARS=$PDS, Dim MLTP1
STYLE=Exponential) + MA(VolatDwnDay, BARS=$PDS, Dim VolatC As BarArray
STYLE=Exponential) + 0.0001); Dim UV As BarArray
RS1 = RS*Mltp; Dim DV As BarArray
Rate = Mltp1*(1+RS1); Dim RS As BarArray
CLOSE()[1]+Rate*(CLOSE()-CLOSE()[1]) Dim Rate
Dim RSVe As BarArray
Figure 8 shows a weekly chart of the S&P 500 showing MLTP1 = 2/(Periods + 1)
the crossovers automatically. VolatC = C Of independent1
—support@optuma.com UV = IIF(C>C[1],VolatC,0)
DV = IIF(C<C[1],VolatC,0)
RS=Abs(XAverage(UV,Pds,0)-XAverage(DV,Pds,0))/(XAv
erage(UV,Pds,0)+XAverage(DV,Pds,0)+0.00001)
F TRADERSSTUDIO: MARCH 2022 TRADERS’ RS=RS*Mltp
Rate=MLTP1*(1+RS)
TIPS CODE RSVe = RSVe[1] + Rate*(C-RSVe[1])
The importable TradersStudio file based on RSVEMA = RSVe
Vitali Apirine’s article in this issue, “Relative Strength Moving End Function
Averages, Part 3: The Relative Strength Volatility-Adjusted '--------------------------------------------
Exponential Moving Average (RS VolatAdj EMA),” can be 'INDICATOR PLOT:
Sub RSVEMA_IND(Periods, Pds, Mltp)
obtained on request via email to info@TradersEdgeSystems. Dim RSVe As BarArray
com. The code is also available on this magazine’s website at RSVe=RSVEMA(Periods, Pds, Mltp)
Traders.com in the Traders’ Tips section. plot1(RSVe)
Code for the author’s indicators is provided in following End Sub
files: '-------------------------------------------

54 • March 2022 • Technical Analysis of Stocks & Commodities

 Figure 9 shows the RSVEMA indicators (10- and 50-bar)
on a chart of Amgen (AMGN) during part of 2013.
—Richard Denning
info@TradersEdgeSystems.com
for TradersStudio

F T HE ZORRO PROJECT: MARCH 2022 TRADERS’

TIPS CODE
The exponential moving average (EMA) and the
relative strength indicator (RSI) are both very popular indi-
cators. In his article in this issue, “Relative Strength Moving
Averages, Part 3: The Relative Strength Volatility-Adjusted
Exponential Moving Average (RS VolatAdj EMA),” Vitali
Apirine combines them. He measures the relative strength FIGURE 10: ZORRO PROJECT. Here, the RSEMA(10,10,10) is applied to a chart
of a volatility index (VIX) and uses the result as an EMA of the SPX500.
time period.
The algorithm from the article, slightly reformulated for a crash from division by zero. In order to support multiple
clarity, is as follows: function calls with multiple assets, I am using here a series
RSEMA[0] = Alpha * Price + (1-Alpha) * RSEMA[1] of length 2 for RSEMA, not a static variable as in the origi-
nal code.
This is a classic EMA, but with a volatility-dependent alpha Figure 10 shows a chart that replicates the chart in the
factor: article in this issue, with the RSEMA(10,10,10) applied to a
chart of the SPX500.
Alpha = 2/(TimePeriod+1) * (1 + 10*abs(EMAUp-EMADn)/ Looking at the chart, you can see that the RSEMA (blue)
(EMAUp+EMADn))
has noticeably less lag than the EMA (red), which is not re-
EMAUp and EMADn are the VIX EMA of days with posi- ally surprising because the higher alpha rate is equivalent
tive returns and the VIX EMA of days with negative returns. to a smaller EMA time period. The author states that EMA
The separation into positive and negative days resembles the crossovers of this indicator can be used as potential entry
RSI. There is a double EMA in this formula. The factor 10 is points for long trades, with the caveat that they can produce
inserted to improve the result. a lot of whipsaws and should be used in conjunction with
VIX historical data is not available via API from free on- price analysis. As you can see in Figure 11, a long-only SPY
line sources (as far as I know), but most brokerages offer the trading system with crossovers of the RSEMA and EMA at
data. Thus, Zorro users can most likely download the data default parameter values produced a positive end result but
from their brokerage using the Zorro download script. with large drawdowns. Thus, it should be used only in con-
Following is C code as converted from the MetaStock junction with price analysis.
code given in Apirine’s article in this issue: The RSEMA indicator and the SPY trading system can
be downloaded from the 2022 script repository on https://fi-
C code
var RSEMA(int Periods, int PdsEMA, var Mltp)
{
asset("VIX");
var VolatC = priceC();
asset(AssetPrev);
vars VolatUpDays = series(ifelse(RET(1)>0,VolatC,0)),
VolatDnDays = series(ifelse(RET(1)<0,VolatC,0));
var EMAUp = EMA(VolatUpDays,PdsEMA),
EMADn = EMA(VolatDnDays,PdsEMA);
var RS = abs(EMAUp-EMADn)/
(EMAUp+EMADn+0.00001)*Mltp;
var Rate = 2./(Periods+1)*(RS+1);
vars RSEMAs = series(0,2);
return RSEMAs[0] = Rate*(priceC() + (1-Rate) * RSE-
MAs[1];
}

AssetPrev is the asset that was selected when the RSEMA

FIGURE 11: ZORRO PROJECT. This example chart shows a long-only SPY trading
function is called. Adding 0.00001 to the divisor prevents system with crossovers of the RSEMA and EMA at default parameter values.

March 2022 • Technical Analysis of Stocks & Commodities • 55

 FIGURE 12: EXCEL. Volatility (^VIX) relative strength adjusted EMAs of the close are shown.
FIGURE 13: EXCEL. Using somewhat longer parameters help to reflect overall trends in the price and may help prevent leaving money on the table by exiting too soon.
nancial-hacker.com. The Zorro software can be downloaded
from https://zorro-project.com.
—Petra Volkova
The Zorro Project by oP group Germany
https://zorro-project.com
F EXCEL: MARCH 2022 TRADERS’ TIPS CODE
In his article in this issue, Vitali Apirine uses a volatility relative
strength construct to condition an EMA (exponential moving
average) of a closing price series.
Simply stated, when using this construct, the higher the
volatility RS (relative strength) at any given bar, the more re-
active the resulting EMA is to the closing price of that bar.
In terms of the user parameters to this indicator, param-
eters of a shorter length mean a result that tracks the close
price closely (Figure 12) while parameters of a longer length
ease the fit (Figure 13).
The author suggests that when the shorter-spec EMA
crosses up over the longer-spec EMA, and the overall trend
56 • March 2022 • Technical Analysis of Stocks & Commodities
is up, we have a potential buying opportunity. He cautions
that down crosses should be ignored in an overall uptrend.
So other exit strategies are necessary. Likewise, a down
cross in an overall downtrend can signal a potential shorting
opportunity, with similar exit caveats.
To download this spreadsheet: The spreadsheet file for
this Traders’ Tip can be downloaded from traders.com in
the Traders’ Tips area. To successfully download a working
version of the spreadsheet, follow these steps:
• Right-click on the link to the Excel file, then
• Select “save target as” to place a copy of the spreadsheet
file on your hard drive.
—Ron McAllister
Excel and VBA programmer
rpmac_xltt@sprynet.com
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March 2022 • Technical Analysis of Stocks & Commodities • 57

 FUTURES LIQUIDITY

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

Trading Liquidity: Futures

Contracts to
Effective
Commodity Futures Exchange % Margin Trade for Equal Relative Contract Liquidity
% Margin
Dollar Profit
S&P 500 E-Mini (Mar ’22) CME 5.8 11.4 2 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>>>>>>
10-Year T-Note (Mar ’22) CBOT 1.3 13.3 14 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
Ultra T-Bond (Mar ’22) CBOT 3.8 12.6 3 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
Crude Oil WTI (Mar ’22) NYMEX 7.9 5.4 1 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
Russell 2000 E-Mini (Mar ’22) CME 3 5.9 2 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
30-Year T-Bond (Mar ’22) CBOT 2.5 10.3 5 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
Nasdaq 100 E-Mini (Mar ’22) CME 6.1 11.3 1 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
5-Year T-Note (Mar ’22) CBOT 0.9 15.2 26 •••••••••••••••••••••••••••••••••••••••••••••••
Ultra 10-Year T-Note (Mar ’22) CBOT 1.9 14.5 9 •••••••••••••••••••••••••••••••••••••••
Soybean (Mar ’22) CBOT 2.1 4.6 3 ••••••••••••••••••••
2-Year T-Note (Mar ’22) CBOT 0.3 10.1 32 •••••••••••••••••
Corn (Mar ’22) CBOT 5.4 10.6 11 ••••••••••••
Gold (Feb ’22) COMEX 3.9 12.6 3 ••••••••••••
Soybean Meal (Mar ’22) CBOT 0.9 3.2 3 ••••••••••••
Dow Futures Mini (Mar ’22) CBOT 5.5 11.6 2 •••••••••••
Euro FX (Mar ’22) CME 1.7 19.4 14 ••••••••••
S&P 500 VIX (Feb ’22) CFE 34.6 17.7 3 ••••••••••
Gasoline RBOB (Mar ’22) NYMEX 6.6 7.8 2 •••••••••
ULSD NY Harbor (Mar ’22) NYMEX 6.2 8 2 •••••••••
High Grade Copper (Mar ’22) COMEX 5.3 9.6 3 •••••••
Natural Gas (Mar ’22) NYMEX 16 22.5 6 •••••••
Silver (Mar ’22) COMEX 8.6 16.6 3 •••••••
Eurodollar (Dec ’22) CME 0.1 7.9 50 ••••••
Coffee (Mar ’22) ICE/US 11.1 17.4 3 •••••
Australian Dollar (Mar ’22) CME 2.5 10.6 11 •••
British Pound (Mar ’22) CME 2.8 17.9 13 •••
Japanese Yen (Mar ’22) CME 2.5 20.3 13 •••
Sugar #11 (Mar ’22) ICE/US 7 13.4 16 •••
Wheat (Mar ’22) CBOT 5.3 11.3 10 •••
30-Day Fed Funds (Apr ’22) CBOT 0 2 20 ••
Canadian Dollar (Mar ’22) CME 2 14.3 15 ••
Cotton #2 (Mar ’22) ICE/US 6.4 10.6 5 •• CBOT Chicago Board of Trade, Division of CME
Crude Oil Brent (F) (Mar ’22) NYMEX 7 8.6 2 •• CFE CBOE Futures Exchange
Lean Hogs (Apr ’22) CME 5.5 9 8 •• CME Chicago Mercantile Exchange
Live Cattle (Apr ’22) CME 2.7 6.3 7 •• COMEX Commodity Exchange, Inc. CME Group
Bitcoin Futures (Jan ’22) CME 39.3 43.1 1 • ICE-EU Intercontinental Exchange-Futures - Europe
Hard Red Wheat (Mar ’22) KCBT 5.9 10.8 8 • ICE-US Intercontinental Exchange-Futures - US
Mexican Peso (Mar ’22) CME 6.4 30.5 35 • KCBT Kansas City Board of Trade
Platinum (Apr ’22) NYMEX 6.9 15.1 7 • MGEX Minneapolis Grain Exchange
Bitcoin Micro (Jan ’22) CME 39.3 46.9 54 NYMEX New York Mercantile Exchange

Brazilian Real (Feb ’22) CME 7.5 15 19
2203
Butter Cash-Settled (Mar ’22) CME 3 5.4 6
Trading Liquidity: Futures is a reference chart for speculators. It compares markets “Relative Contract Liquidity” places commodities in descending order according to
according to their per-contract potential for profit and how easily contracts can be bought how easily all of their contracts can be traded. Commodities at the top of the list are easi-
or sold (i.e., trading liquidity). Each is a proportional measure and is meaningful only est to buy and sell; commodities at the bottom of the list are the most difficult. “Relative
when compared to others in the same column. Contract Liquidity” is the number of contracts to trade times total open interest times a
The number in the “Contracts to Trade for Equal Dollar Profit” column shows how volume factor, which is the greater of:
many contracts of one commodity must be traded to obtain the same potential return In volume
as another commodity. Contracts to Trade = (Tick $ value) x (3-year Maximum Price 1 or exp –2
In 5000
Excursion).

58 • March 2022 • Technical Analysis of Stocks & Commodities

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March 2022 • Technical Analysis of Stocks & Commodities • 59

 Trading Perspectives

SOME PERSPECTIVES ON THE EQUITIES WORLD

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

UP, DOWN, OR SIDEWAYS
We entered 2022 on the back of stel-
lar performances for most indexes.
While a rising market lifts most
stocks, it also creates significant
anomalies in performance as well
as in the fundamentals. Valuations
haven’t been given much respect
throughout the growth years, but we
saw a bit of that concern coming into
view in November and December
2021 and into this year so far.
I want to bring your attention to the
opportunities that exist in a market
such as the one we have now, with the
market regime changing through the
actions of the Federal Reserve.
As readers are aware, the Fed
has been buying asset-backed
securities such as Treasury bonds
and mortgage-backed securities
(MBS), totaling over $4 trillion (now
totaling over $8.5 trillion). On March
15, 2020, the Fed kicked off this
round of quantitative easing (QE) by
purchasing $500 billion of Treasuries
and $200 billion of mortgage-backed
securities. Since November 2021, the
Fed has been tapering (that is, buying
less). The Fed is reducing purchases
of new assets by $30 billion a month
(that is, if the banks didn’t sit on the
funds and actually lent out the money)
is that the economy has enjoyed $40
trillion in stimulus.
What happens now that the taper
is underway? Will the market go up,
down, or trade sideways?
After-effects of
Fed tapering
Of course, no one really knows for
certain what will happen. There is
much debate surrounding whether
this will all lead to a deep correction
cycle, or whether we will remain in
The future may be
bright and market
growth sustainable, or
the sun may be setting
on the years of stimulus
and cheap money.
a trading range for an ex-
tended period, or whether
we will see a “roaring
twenties”-like rally.
Recent CPI data in-
dicated year-over-year
gradually without causing a reces-
sion. But Volcker viewed inflation
as a self-fulfilling prophecy—people
expected costs to rise, so they would
buy and spend more, causing prices
to rise even further.
So here we are, on the doorstep of
caution and opportunity.
Do we move more to cash, or do
we stay fully invested? Are we safe
holding growth stocks overnight and
for their future prospects? When we
trade, should we be hedging?
Hedging with pair
relationships
Trading pair relationships in equities
is a terrific way to hedge while at
the same time benefitting from sub-
stantial moves between instruments.
When you use a single allocation
of capital to a trade, you have just
one shot for it to work or not, over
a specified timeframe. But by using
STOCKODDS WEB SCREENER

until they reach the point that they inflation is at a resounding

are no longer buying. (It is important
to note that “taper” does not mean
“selling” those assets.)
The Fed purchased these assets
from its member banks. The cash that
these banks raised from the sale of
the assets is to be loaned out while
keeping 10% in reserve. The theory
60 • March 2022 • Technical Analysis of Stocks & Commodities
7%, which is the highest
reading since I graduated
from high school in 1982.
That year was the second
year of a bear market. Paul
Volcker was Fed Chair. At
the time, many thought the
Fed could reduce inflation
FIGURE 1: COMPARING DATA POINTS FOR TWO SYMBOLS.
In pair trading, when seeking symbols to trade, it’s necessary
to start with a framework for each category of pair. Some pairs
will work better than others as a trading instrument. Here, some
metrics for two symbols, JPMorgan Chase (JPM) and Bank of
America (BAC), are compared.
 Trading Perspectives
pairs, you can hold part of the pair
and trade around a core position,
benefitting from the potential drift
as well as earning money by trading
the expansion and contraction of the
spread relationship.
Some pairs will make better
trading instruments than others. This
suggests that you have to utilize the
right framework for each category
of pair.
Take a look at Figure 1, which
shows a comparison of data points for
JPMorgan Chase (JPM) and Bank of
America (BAC). At the time of this
snapshot, JPM has a lower trailing
12-month price-to-earnings and
lower forward P/E than BAC does.
The recent earnings of JPM sent it
tumbling lower and with that came
an improvement in the price-related
metrics.
The odds and average performance
expected is based on the RSI-14 signal
and subsequent performance over the
20 days following January 18, 2022.
The RSI value shows that JPM is
closer to an oversold value than BAC
and has greater odds and more robust
average performance coming out of
this than BAC. JPM has a higher
Sharpe value, indicating a better risk-
adjusted return is possible.
Figure 2 shows the ratio spread of
JPM to BAC from January 2011 to
January 18, 2022. We can observe that
the price relationship of JPM to BAC
has reverted back to 10-year lows,
which may represent an opportunity
to trade long JPM and short BAC
going forward.
We can utilize the odds and
performance expectations to create
a good starting point. Additionally,
combining that with a historical
perspective and with post-event items
such as earnings events, along with
supporting fundamental metrics, can
provide the basis and backdrop for
forming pairs. It can get you started
with setting up a “trade some, hold
FIGURE 2: RATIO OF TWO STOCK SYMBOLS. The ratio spread of JPM to BAC from January
2011 to January 18, 2022 can be observed in the graph. In this example, you can see that the price
relationship of JPM to BAC reverted back to 10-year lows, which could represent an opportunity to
trade this pair, where the trader would go long JPM and short BAC.
some” framework. which you lock in. You still have
We have to acknowledge that two your original layer on, still at a loss,
stocks from the same industry may but through your trading actions you
continue to travel on different paths have meanwhile earned money.
for extended periods of time, so we The goal would be to trade the
approach all trading and investing in volatility as if that is the only thing
these relationships from a probability that mattered, earning money from
perspective. Even if we have a few layer 2 and 3 on and off, over and
ducks lined up, and a high probability over again. The first layer keeps you
informed and more sensitive to the
actions of the individual stocks as well
Where the relationship as the spread. In time, you may see
doesn’t perform the spread tracking back to where you
directionally as desired, started, eventually bringing the first
earning money from layer into the green as well. There is
trading any spread also the scenario in which you may
elasticity can be be timely and profitable on your very
first trade, only establishing the first
offsetting. layer, which works, and you take
profit, then the spread keeps moving
of success, we must be aware of and you have no remaining position
various potential outcomes. Where to benefit from. This is where some
the relationship doesn’t perform conviction about the fundamental
directionally as desired, earning mean-reversion opportunity can help.
money from trading any spread In comparing the price/earnings (PE)
elasticity can be offsetting. ratios, we see some room for either
An example would be in using a JPM to move higher or BAC to
two- or three-layer model (with a move lower, or a bit of both. For the
“layer” here meaning 300 BAC short purposes of this article, I have kept
and 100 JPM long). In this example, it simple but there are many other
say your first layer moves against considerations such as EPS changes,
you, resulting in a loss. You see an dividend yields, price to book, debt,
opportunity to add another layer and and business segment correlated or
that works and results in a profit, uncorrelated risks.
March 2022 • Technical Analysis of Stocks & Commodities • 61
 Trading Perspectives
There are hundreds of pairs to
create and utilize in the days and
years ahead. I recall the incredible
fundamental and performance-based
mean-reversion we experienced from
2000 to 2003 after the internet bubble
that culminated in 2000. There are
similarities now from the massive
growth we have witnessed since the
low of 2009.
I am currently identifying op-
portunities within the peer groups
that could result in multiyear moves,
similar to in 2000–2003. This means
that I might be able to ride core posi-
tions for an extended period of time,
picking up trading action around the
core as well.
Spreads can also provide that
benefit of being hedged against
market moves and any shock and
awe that may occur due to a world
getting stranger by the day.
So where do we go from
here?
So back to our discussion on where the
markets go from here. Historically,
markets have risen in interest rate cut
cycles, but they have also risen during
interest rate hikes, presumably due to
the economy being hot during those
periods. There is the potential to keep
building on our 26.9% gain of the SPY
in 2021, which is stacked on top of
gains since 2009. The average gain
is 16.34% per year, so if you had put
to work $100 in the SPY back then,
that would be $700 now, which beats
62 • March 2022 • Technical Analysis of Stocks & Commodities
FIGURE 3: RATIO OF TWO ETF SYMBOLS. The ratio of IVE (iShares SP500 Value) to IVW
(iShares SP500 Growth) can be seen over 22 years of data in this chart. When inflation is high in
the economy, will value stocks outperform growth stocks? Insights can be gained by viewing ETF
relationships through spreads.
inflation handsomely. so either that is a shot over the bow
During inflationary periods, value and is sustainable for further upside,
stocks may outperform. We have seen or it will fail in lower highs yet again,
evidence of that already. as growth surges.
The future may be bright and
market growth sustainable, or the
Be informed through sun may be setting on the years of
research, examining stimulus and cheap money. There
the signs, comparing are many arguments either way,
and I won’t claim to be an expert
relationships, and on figuring out that direction. I am
taking advantage of here to encourage you to be informed
all the anomalies that through research, examining the
these growth markets signs, comparing relationships, and
have produced. taking advantage of all the anomalies
that these growth markets have
produced.
We can gain insights by viewing Create a portfolio of pairs and trade
ETF relationships through spreads. some of your positions and hold some
Figure 3 shows a comparison of a as warranted.
value ETF and a growth ETF. We
can see that the value relative to
growth has just blipped up in 2022,
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