Today'S K-Wave Hurst'S Cyclic Analysis Identifying Cup Formations Early Interview Product Reviews

THE TRADERS’ MAGAZINE SINCE 1982
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TODAY’S K-WAVE
What the future holds,
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CONTENTS APRIL 2011, Volume 29 Number 5
12 Empowering Traders To 46 Technical Analysis Adapts

Trade Commodities And Thrives
by Gail Mercer by Michael J. Carr and
With more products being added Amber Hestla
to the marketplace, how do you Technical analysis is a professional
decide what to trade? undertaking, but little has been writ-
ten about its foundational principles.
FEATURE ARTICLE
product REVIEWs
56 • WSJ iPad App
16 Today’s K-Wave And Beyond 49 Q&A Review: The Wall Street Journal app
by Koos van der Merwe, Cfp by Don Bright for the iPad
Trying to make sense of the markets This professional trader answers
is always a challenge. Here’s an up- a few of your questions.
60 • MetaSwing 4
dated look at the Kondratieff wave Review: MetaStock and
after 2010. INTERVIEW TradeStation add-on for
50 Then And Now volatility-based technical analysis
24 Hurst’s Cyclic Analysis With Tim Slater
by David Hickson by Jayanthi Gopalakrishnan and 64 • NinjaTrader 7
This crash course on an almost- Bruce Faber Review: Trading software
forgotten theory could shed some Tim Slater was at the forefront of
light on how you can trade consis- computerized technical analysis DEPARTMENTS
tently and profitably. and saw how it all began. He told
us how he saw it. 6 Opening Position
8 Letters to S&C
30 Engineering Look 66 Traders’ Tips
At Cycles 59 Explore Your Options
by Tom Gentile 72 Traders’ Resource
by Arthur Zernov
Do cycles exist in markets? Here’s Got a question about options? 74 Advertisers’ Index
a look at the markets from a dif- 74 Editorial Resource Index
ferent angle — one that will help 76 Books for Traders
you realize that there is a harmony 77 Futures Liquidity
among cycles, events, and market 78 †Traders’ Glossary
behavior.
79 Classified Advertising
80 Trade News & Products
37 Futures For You
by Carley Garner
Here’s how the futures market
really works.
38 Identifying Cup TIPS

Formations Early
by Giorgos Siligardos
Here’s a simple mechanical
recognition method for identifying
possible emerging cup formations. TIPS
This article is the basis for Traders’ Tips
this month.
These articles – and articles like them – n Cover art: David Goldin
TCA WM can be found online at www.traders.com
n Cover concept : Christine Morrison/David Goldin
Copyright © 2011 Technical Analysis, Inc. All rights reserved. Information in this publication must not be stored or reproduced in any form without written permission from the publisher. Technical Analysis of
Stocks & Commodities™ (ISSN 0738-3355) is published monthly with a Bonus Issue in March for $64.95 per year by Technical Analysis, Inc., 4757 California Ave. S.W., Seattle, WA 98116-4499. Periodicals
postage paid at Seattle, WA and at additional mailing offices. Postmaster: Send address changes to Technical Analysis of Stocks & Commodities™ 4757 California Ave. S.W., Seattle, WA 98116-4499 U.S.A.
Printed in the U.S.A.
4 • April 2011 • Technical Analysis of Stocks & Commodities
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tasc_march2011.indd 1 1/11/2011 4:54:46 PM

April 2011 • Volume 29, Number 5
March 2006 • Volume 24, Number 3 O
Opening Position
PENING POSITION
The Traders’ MagazineTM

The Traders’ Magazine TM
H
EDITORIAL
EDITORIAL
editor@traders.com
editor@traders.com
Editor in Chief Jack K. Hutson
O
Editor in Chief Jack K. Hutson
Editor Jayanthi Gopalakrishnan
Editor Jayanthi Gopalakrishnan
ats off to Ibm’s Watson supercomputer
Managing Editor Elizabeth M.S. Flynn
Managing Editor Elizabeth M.S. Flynn for its
nce victory
again on the
we got TV showofJeop-
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Production Manager Karen
ProductionManager KarenE.E.Wasserman
Wasserman ardy! I was interested in finding out if Watson
how sensitive the financial markets
Director Christine
ChristineMorrison
would
are. Weprevail, but I had reservations about
Art
Art Director Morrison saw a major selloff in the Japanese
Graphic Designer Wayne
GraphicDesigner SharonShaw
watching the show just because— I didn’t wanta
Yamanaka
Staff Writers
Editorial Dennis
Intern D. Peterson,
Emilie Rommel Bruce Faber
markets, which — as expected triggered
Webmaster Han J.David
Technical Writer Kim Penn to find out that a computer’s trivia knowledge
domino effect on markets throughout the
Contributing Dennis John
Staff WritersEditors Ehlers, Bruce Faber
D. Peterson,
Anthony W. Warren, Ph.D. was better than mine. Do the results of this
world. Add disappointing earnings numbers
game have any implications
and youofhave which way
Webmaster Han J. Kim
from US corporations a situa-
Contributing EditorsDon
ContributingWriters Bright,
John Thomas
Ehlers, KevinBulkowski,
Lund,
Martin
AnthonyPring, Barbara Ph.D.
W. Warren, Star
the world is heading? In this situationoff
tion that just got worse. So what started you as
Contributing Writers Don Bright, Thomas Bulkowski,
Martin Pring, Adrienne Toghraie have Watson, which uses a computer proces-
a strong year ended up correcting, and rather
OFFICE OF THE Publisher
sor to analyze
rapidly. I mustalladmit
possible
that outcomes,
although correc-versus
Publisher Jack K. Hutson
Manager Linda
Credit OFFICE OF Eades
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PUBLISHER humans, who use their instincts towhen
tions are healthy for any market, try toyou
come haveupawith possible
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Jack K. Hutson computer wins.
Prior to the Federal Reserve’s F OMC meeting, I usually take a look at the yield
Sean M. Moore
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Project Engineer Linda
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Jason K. Moore
Hutson
Mary K. Sean
Project Engineer
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M. Moore any of the emotions that we humans constantly have to. This gave Watson
is that the Fed is going to tighten at their January 31st meeting, I am a clear
concerned
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Controller Advertising
Mary K. Hutson
advantage.
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beJeopardy!, contestantofwho
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They
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to preserve number of emotions running through their heads before they
capital.
National Sales Manager Edward W. Schramm
Classified & Web Sales Chris J. Chrisman hit the buzzer. Doesn’t this remind you of trading? Don’t you have a ton of thoughts
running through your head before you hit that enter button?
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Production Coordinator Karen Moore
So
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Production Coordinator Karen Moore
Circulation
CIRCULATION with that in mind, you can see why it’s important to design a trading
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circ@traders.com
circ@traders.com the markets is easy, number of options increases. makes it
Manager Sean
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important to be thorough with the different types of orders, front-end software,trad-
possibilities have spilled into the trading world. Aren’t the institutional
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and
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Subscription Sales Karen
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Stacy Bagnall, Carmen Hale trading out there. Lee Leibfarth, in his article “The Automated
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Staff members may may bebe emailed
emailed through
throughthe
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But before getting to the stage of placing that trade, you need to understand the than the big play-
using first
first initial
initial plus
plus last
last name
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ers, andyou
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tional Reporting
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Stocks | Futures | Forex

The editors of S&C invite readers to submit their opinions and information on subjects for the authors:
relating to technical analysis and this magazine. This column is our means of communi- 1. What is in their device A?
cation with our readers. Is there something you would like to know more (or less) about? 2. Which charting platforms can their
Tell us about it. Without a source of new ideas and subjects coming from our readers, this model be used with?
magazine would not exist.
3. Could the model be applied to other
Email your correspondence to Editor@Traders.com or address your correspondence
markets, including commodities and
to: Editor, Stocks & Commodities, 4757 California Ave. SW, Seattle, WA 98116-4499. All
forex?
letters become the property of Technical Analysis, Inc. Letter-writers must include their full
name and address for verification. Letters may be edited for length or clarity. The opinions 4. Could this model be used for intraday
expressed in this column do not necessarily represent those of the magazine.—Editor charts?
David Butcher
READERS’ CHOICE AWARDS This is especially true when it comes to Authors Aleksey Gersimov and
Editor, corrective waves ABC. Alexander Ershov reply:
Where can I find the results Hgs We appreciate your practical questions and
of your Readers’ Choice hope our clarifications here and example
Awards, which I saw a refer- Author Koos van der Merwe replies: forecasts are of interest to readers.
ence to at your website? Thank you for your interest. You will find
Ahmet my latest article on K-waves in this issue, 1. In regard to your question about device
titled “Today’s K-Wave And Beyond.” A: Our model presupposes that device
The 2011 Readers’Choice Awards can be As for Elliott wave: I always look for A includes all the factors that influence
found in our 2011 Bonus Issue, which was simplicity. In fact, the February 2009 price formation. These factors include
mailed in February to all subscribers, issue of S&C contained my article on El- fundamental economic laws; signals
and which will continue to be mailed out liott wave theory, “Elliott Wave Theory, provided by trading systems; credit and
throughout the year to new subscribers. Simplified.” In this article (available tax cycles; natural cycles; and so on. The
The Readers’ Choice Awards are based from the store at Traders.com), I dem- proposed model — which is constructed
on the results of an online poll asking onstrate that if you look for complicated from an input signal, a device, and an
subscribers to vote for their favorite waves, you will likely be wrong. output signal — is only a convenient
products and services.—Editor My advice is to always stick to the visual image. In actuality, we are talking
first rule of Elliott wave theory: The about greater things.
KONDRATIEFF WAVE wave count must look right. I suggest We act on the premise that any complex
Editor, checking out my February 2009 article system should be studied as a whole. If
I was reading “Kondrati- for more on this. you try to separate the complex system
eff Wave Comeback” by into several simple systems and study
Koos van der Merwe in MARKET INSTRUMENT FUNCTION them separately, and then sum up the
the April 2010 S&C. I am Editor, simple systems into the complex one,
new to the K-wave theory Thank you to authors you end up with a completely different
but I am fascinated by it. It is also my Aleksey Gersimov and system. Thus, we can’t consider the laws
goal to achieve a better knowledge of Alexander Ershov for that form the market separately. All
Elliott wave theory. sharing their article and the factors, which influence the prices,
I was wondering if the author could ideas in “The Market constantly interact and influence each
explain his approach to counting waves. Instrument Function” in the December other as well. The instrument function
I can count simple and straightforward 2010 S&C. method makes it possible to analyze the
waves, but when it comes to patterns Here were some thoughts I came away market as a whole and not be concerned
like an inside day or three falling/rising with after reading the article: with what is the exact cause of each and
candlestick pattern, I get stuck. I have every market action.
been counting using pivot points (such • The idea that the way a price gets to
its current level is important and often 2. Regarding charting platforms: We
as explained by Thomas DeMark), but used MetaStock for producing our final
I run into confusion when the waves get overlooked.
results.
more complicated, as with extensions. • I liked that a person only needs to know
that the fundamental laws defining the 3. In regard to applying this model to
market exist, not figure them out. other markets such as commodities and
forex: We applied our instrument func-
I won’t pretend that I understand all tion method to gold, oil, and the Crb
the complex math that their article dis- index in practice, which we had success
played, but I did have a few questions with. We haven’t yet applied it to the forex
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++Full pg Ad Template.indd 1 2/24/11 1:16:39 PM
market, but we think the results will be positive there too, since
we can find solutions for Etfs such as Fxe and Uup.
4. As to whether this model can be used for intraday charts:
We have tried to find the answer to the integral equation:
~
ƒ(t) = ƒ (τ) E (t–τ)dτ
R
~
which is written for the function ƒ(t) and ƒ(τ). Conversion to
different time frames means using a different quantity of data
~ FIGURE 1: DIA five-year weekly FORECAST. Here are historical prices
points, which determine the functions ƒ (t) and ƒ(τ). (blue) along with the projected movement of prices (red) approximately five years
Of course, insofar as functions in different time frames are forward.
the same and differ from one another only in level of detail,
the instrument function will be the same for any time frame,
and we cannot glean any new information from small time
frames. The picture of the future will be the same, but it will
become overloaded with noise. However, when we change
days to weeks, the amount of patter goes down sharply and
the computational picture of the future becomes better for
practical application (Figure 1).
We can’t say why there is more noise in small time frames; it
seems as though the cause is the randomness of intraday pric-
ing. We simply observe that when we build the forecast based
on intraday bars, the chart becomes overloaded with noise.
Thus, the market instrument function is of little use for
revealing the finer structure of price movement. We feel the FIGURE 2: DIA 10-year weekly FORECAST. This chart updates the forecast from
method is inefficient for forecasting in small time frames and Figure 1 out to 10 years (till 2020).
impossible for intraday speculation. But this doesn’t mean that
the market instrument function is useless for projecting market
targets. For example, we can forecast price movement for the
Dia for the next 10 years in a weekly time frame (Figure 2).
We can see the following tendencies from the chart:
January 2011 to June 2012: Bearish market

June 2012 to January 2014: Bullish market
February 2014 to March 2015: Bearish market
March 2015 to February 2017: Flat
March 2017 to May 2018: Bearish market, with a deep
market crisis portending
Using the model to forecast long-term tendencies may be

more profitable in comparison with intraday speculation,
since using such a long-term forecast can make it possible to
stay in step with the overall market direction and help you to
avoid the most serious mistakes in timing. Having this type of
information makes the market instrument function a powerful
tool for planning and constructing an investment strategy.
Besides, this method makes it possible to use classical tech-
nical analysis not only for analyzing the past and present but
also for analyzing the future. Figure 3 provides an example of
a forecast for the future movement of such market indicators
as the relative strength index (Rsi), moving average conver-
gence/divergence (Macd), commodity channel index (Cci),
and stochastics (Sto).
Finally, events can be late or take the lead over the forecast, FIGURE 3: DIA five-year FORECAST FOR MACD, RSI, CCI, AND STO. The
but as a rule, they always observe the law, which is set by the historical values for these indicators (blue curves) are shown along with the forecasted
market instrument function. values of the indicators (red curves).
+1104 Letters_New2.indd 2 2/23/11 6:32:03 PM

ERRATA
MARKET INSTRUMENT FUNCTION the underlying stock at the strike price.” interest are falling, subtract the absolute
In “The Market Instrument Function” However, shouldn’t this have read, value of the change in open interest from
in the December 2010 S&C, an error “If the stock price is above the strike today’s volume to emphasize that the
occurred in one of the charts on page price for a given call option at expira- current trend down may be ending and
54. The keybox in the chart in Figure 2 tion, that option will be exercised and an uptrend may be emerging.”
should have read: the option seller called upon to deliver
3. The equation for the Fvoi indicator
100 shares of the underlying stock at the
------ SPDR Dow Jones Industrial Average (futures volume open interest) was miss-
strike price”?
(NYSE Arca: DIA) ing a set of parentheses. The equation
David Carpenter
------ Forecasted DIA [instead of “SPY”] should have read:
In addition, the author biography at You are correct — it should have read Fvoii = Fvoii–1 + ((Vi + (OIi – OIi–1)) *
the end of the article should have stated “above.” Thank you for bringing this to ((Pi – Pi–1) / |Pi – Pi–1|))
that coauthor Alexander Ershov has been our attention.—Editor
studying the use of mathematical meth- which also can be written as:
ods for weak signal reception as applied Editor,
to stock market forecasting since 2005, The article “Investment Vs. Trading In Fvoii =
not since the early 1990s. Covered Call Writing” by Jay Kaeppel in Pi – P i–1
FVOI = FVOI i–1 + Vi + OI i – OI i–1 *
Aleksey Gersimov the February 2011 S&C was interesting i Pi – Pi–1
(avgerasimov@umail.ru) and thorough, but Kaeppel causes some
Alexander Ershov confusion in his comment in step 3 at the
Thus, the entire expression (Vi + (OIi –
(amershov@umail.ru) bottom of page 20 when he writes, “If
OIi–1) should be enclosed in parentheses,
an option expires, it will do so either in-
so that the whole result gets multiplied
MEASURING TRADING the-money (stock price below the strike
by ((Pi – Pi–1) / |Pi – Pi–1|).
SYSTEM PERFORMANCE price) or out-of-the-money (stock price
Otherwise, all charts and analyses
Editor, above the strike price).”
remain the same.
I found the article by Stephen Massel in According to Investopedia.com, the
Teresa Fernandez
the March 2011 S&C (“What Can You definition of “in-the-money” is when the (teresa.fernandez.wg72@
Expect, Mathematically?”) to be very option’s strike price is below the market wharton.upenn.edu)
informative. However, I had problems price of the underlying asset for a call
with the calculation for the ME (math- option, not above. By the same token, JANUARY 2011 EXCEL TRADERS’ TIP
ematical expectation) result for the “out-of-the-money” is when the option’s Editor,
sample scalping system. I got a result strike price is above the market price of In the January 2011 Traders’ Tip for
of 33 for this calculation, rather than the the underlying, not below. Excel, an error occurred in the formula
26 shown in the article. In addition, the But while I’m writing, let me say for column Q. Thus, I am providing a
point plotted on the chart seems to be that the articles in S&C are always replacement spreadsheet file for “Com-
off a bit. Did I misinterpret something thought-provoking, challenging, and bining Rsi with Rsi.xls.”
in the article? quite informative. As programmers and manufacturers
Jack Brennan Jim Kimes both know, there is nothing like a real,
live user to find the bugs in something
Author Stephen Massel replies: You, too, are correct. Thank you for you have built. My thanks to the readers
You are correct — the R/R ratio for pointing out these errors.—Editor who tried large smoothing numbers and
the scalp system should have been 0.8 let me know that something was slightly
instead of 0.9, yielding an ME of 26 [70 CALCULATION OF FVOI off on the charts in the original version
x 0.8 – (100–70)]. With an R/R ratio of Editor, of the spreadsheet.
0.9, it would indeed have an ME of 33. In my February 2011 article “Does Gold Ronald McAllister
Thanks for pointing it out. Still Have Room to Run?” in S&C, sev- (rpmaca_sprynet.com)
eral errors appeared as follows:
COVERED CALL WRITING Subscribers can download the corrected
1. The first sentence of the third bulleted spreadsheet file, “Combining Rsi with
Editor,
point on page 23, second column, should Rsi.xls,” from our website at www.Trad-
On page 13 of the February 2011 article,
have read: “When prices are falling but ers.com in the January 2011 Traders’
“Investment Vs. Trading In Covered Call
open interest is rising, add the change in Tips area at http://www.traders.com/
Writing,” author Jay Kaeppel writes, “If
open interest to today’s volume.” Documentation/FEEDbk_docs/2011/01/
the stock price is below the strike price
for a given call option at expiration, that 2. The first sentence of the fourth bulleted TradersTips.html (or use the search
option will be exercised and the option point on page 23, second column, should engine at Traders.com and type in “com-
seller called upon to deliver 100 shares of have read: “When both price and open bining rsi with rsi”).—Editor S&C
April 2011 • Technical Analysis of Stocks & Commodities • 11
+1104 Letters_New2.indd 3 3/2/11 11:00:58 AM

currencies? What are the market
hours? What are the tick values?
What is the slippage for any given
instrument? What is a good profit
target for the market they choose?
What stop should they use? So
many questions to ask and so
many new things to learn!
Often, instead of researching
what’s available, novice traders
simply choose a market that
others may have recommended.
With little or no knowledge
about how a market moves, the
trader is forced to guess what
their stops should be, as well
as how to take profits.
Getting enough information is
the solution for the new trader’s
dilemma, obviously. Let’s shine
some light on four commodity
markets: crude light, silver, gold,
and platinum.
High volume
One of the first things a nov-
ice trader should look at when
considering a new instrument
is volume. In order to enter and
exit a market, there must be suf-
ficient buyers and sellers. Over
the course of the last few years,
the commodity markets have
undergone a dramatic change
in volume. Figure 1 shows that
the average yearly volume for
crude light, gold, platinum, and
silver markets has more than
quadrupled, with crude light
being the leader, jumping from
MARIO ZUCCA
50,000 contracts in 2006 to
almost 350,000 now.
As Figure 1 demonstrates,
Crude, Silver, Gold, And Platinum
Empowering Traders

there are ample buyers and sell-

ers in the market for crude light
and gold. However, the number
To Trade Commodities of buyers and sellers for silver

is substantially lower, and those
for platinum is lower still. Just by
With more and more products being added to the marketplace, how do you decide what to analyzing volume, the new trader
trade? Here’s a look at what you should consider before trading the commodities. can judge whether it is sufficient
for trading crude light, gold, and
by Gail Mercer possibly silver. Since platinum
has insufficient volume, this
N ew traders are often overwhelmed at the number of different instruments they could is not a market that the trader
trade. Should they trade stocks, indexes, exchange traded funds (Etfs), spot forex, or should consider trading.
+Mercer_w_ad_1_ad at top.indd 1 2/24/11 3:00:20 PM

Average yearly volume for commodities Average yearly tick movement for commodities
400000 600
350000
500
300000
400
250000
CL CL
200000 GC 300 GC
PL PL
150000 SI SI
200
100000
100
50000
0 0
2003 2004 2005 2006 2007 2008 2009 2010 2003 2004 2005 2006 2007 2008 2009 2010
Figure 1: AVERAGE YEARLY VOLUME FOR COMMODITIES. The average yearly Figure 2: Average Yearly Tick Movement for Commodities. The com-
volume for crude light, gold, platinum, and silver markets has more than quadrupled, modities moved slightly less than the indexes through 2006.Then, in 2007,commodities
with crude light being the leader, jumping from 50,000 contracts to almost 350,000 gained an advantage over the indexes.
since 2006.
Market movement platinum has insufficient volume. The second-highest market

Of course, volume is only a piece of the puzzle. The new trader in tick movement is crude light, followed by gold and then
must also look at market movement (ticks) to see if the market silver. Since each tradable has a different tick value, a dollar-
moves sufficiently to profit. Figure 2 shows that the commodi- for-dollar comparison is needed.
ties moved slightly less than the indexes through 2006. Then, Figure 4 shows that platinum does not lead in dollar amounts.
in 2007, commodities gained an advantage over the indexes. The leader when comparing dollar amounts is crude light,
In fact, the average annual tick movement for crude light, followed by silver, gold, and finally platinum.
gold, and platinum has been greater than the average annual Since we know that the commodity markets have increased
tick movement in most of the indexes (Figure 3).
The new trader now has two pieces of information: volume New traders are often overwhelmed at the
and tick movement. As Figure 2 demonstrates, platinum leads
the pack in tick movement, but Figure 1 clearly shows that
number of instruments they could trade.
Average yearly tick movement for indexes Average yearly dollar movement for commodities
350 $5,000.00
$4,500.00
300
$4,000.00
250 $3,500.00
ES $3,000.00
200 CL
YM
$2,500.00 GC
NQ
150 PL
EMD $2,000.00
SI
TF
100 $1,500.00
$1,000.00
50
$500.00
0 $-
2003 2004 2005 2006 2007 2008 2009 2010 2003 2004 2005 2006 2007 2008 2009 2010
FIGURE 3: Average Yearly Tick Movement for Indexes. The average FIGURE 4: Average Yearly DOLLAR Movement for COMMODITIES. Platinum
annual tick movement for crude light, gold, and platinum has been greater than the does not lead in dollar amounts. The leader when comparing dollar amounts is crude
average annual tick movement in most of the indexes. light, followed by silver, gold, and finally platinum.
+Mercer_w_ad_1_ad at top.indd 2 3/3/11 3:06:50 PM

Average yearly dollar comparison for Indexes
$3,000.00
$2,500.00
$2,000.00
ES
YM
$1,500.00
NQ
EMD
$1,000.00 TF
$500.00
$-
2003 2004 2005 2006 2007 2008 2009 2010
FIGURE 5: Average Yearly Dollar Comparison for Indexes. We see that, dollar
for dollar, up until 2006, the indexes moved more. Again, as of 2007, the commodities began For more information circle No. 15
moving more, dollar for dollar. And, again, crude light is the leader of the pack.
substantially in both volume and tick per session. Therefore, if you are trad- Average volume by session time
movement since 2007, let us compare the ing crude light, during the US morning Asia London US AM US PM
commodity dollar movement with that of session, the average tick movement CL 1414 4744 44660 71680
the indexes. Figure 5 compares the average would be 217 ticks. Following the 10% Si 461 1228 9272 6174
yearly movement in dollars. Dollar for rule, the profit target would be 22 ticks. GC 2373 5656 36516 23022
dollar, up until 2006, the indexes moved Since we always use a risk–reward ratio PL 109 178 669 435
more. But as of 2007, the commodities of 1:2 (meaning for every dollar of risk
FIGURE 6: Average Volume by Session Time. As
began moving more. Once again, crude we gain two dollars), our stop would be you can see, crude light and gold have adequate volume
light is the leader of the pack. 22 divided by two or 11 ticks. during each of the sessions. However, the majority of
the volume is during the US session and even then,
The different You are now empowered platinum still has a very low volume average.
trading sessions The new trader can now begin trad-
Now that we have identified the tradables ing commodities with the following Average tick movement by session time
with adequate volume and movement on knowledge: Asia London US AM US PM
a daily basis, we can look at the volume n Commodities have increased in CL 76 126 217 279
and tick movement for the different volume since 2007. Si 36 49 100 78
sessions. Figure 6 shows the average GC 71 89 177 137
n Crude light, gold, and silver have suf-
volume for each four-hour session: Asia, PL 128 151 278 218
London, the US morning session, and the ficient volume for intraday trading.
US afternoon session. Crude light and n Platinum has insufficient volume FIGURE 7: Average Tick Movement by Ses-
gold have adequate volume during each for intraday trading. sion Time. If you are trading crude light, during the
US morning session, the average tick movement is 217
of the sessions. However, the majority of
n Commodities move more than the ticks. Following the 10% rule, the profit target would be
the volume is during the US session and
indexes in tick movement. 22 ticks. Since we always use a risk–reward of 1:2, our
even then, platinum still has a very low stop would be 22 divided by two or 11 ticks.
volume average. If a new trader planned n Platinum leads in tick movement.
on trading the Asian or London session, n Crude light leads in dollar move- currently trades futures, forex, indexes,
he or she would need to limit the markets ment, followed by silver and gold. and stocks.
to either crude or gold.
n Platinum has the least amount in
dollar movement. Suggested reading
What are your Mercer, Gail [2011]. “Empowering Trad-
potential profits? n The 10% rule works for 1:2 profit ers With The Russell 2000,” Technical
Since we have limited the potential targets and stop-losses. Analysis of Stocks & Commodities,
markets to crude light, silver, and gold, Volume 29: March.
we can calculate our potential profit tar- Gail Mercer is a trader, director, and _____ [2010]. “Looking At Other Mar-
gets. The 10% rule is one of the easiest instructor for tradershelpdesk.com, kets,” Technical Analysis of Stocks &
methods with which to do this. Simply and is known as an “indicator expert.” Commodities, Volume 28: May.
calculate the average tick value for the Mercer hosts a free live trading room ‡Microsoft Excel
session and then multiply by 10%. Figure where she teaches forex and index trad-
7 indicates the average tick movement ers how to approach the markets. She ‡See Editorial Resource Index S&C
+Mercer_w_ad_1_ad at top.indd 3 3/2/11 11:03:04 AM

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260567mea01A
260 hr
+Merwe.indd 1 3/3/11 2:58:25 PM

CYCLES
Kondratieff A Go-Go
Today’s K-Wave
And Beyond
Trying to make sense of the markets is always been aware of them. However, there is no evidence
a challenge. Here’s an updated look at the that he ever tied his wave counts to the K-wave.
Kondratieff wave after 2010.
Using waves
But in all my long-term analyses, I do tie the K-
W
hen Nikolai Kondratieff developed his wave and the Elliott wave counts together, because
wave theory, he had never heard of tech- I believe that the K-wave identifies major lows and
nical analysis. He had also never met highs in any Elliott wave count. In my November
Ralph Elliott of Elliott wave theory fame, 2008 Stocks & Commodities article on the K-
a man who lived in the same generation wave, I explained the theory, and I have repeated the
that he did, a man who expressed in a book he had K-wave chart here in Figure 1 for you to study.
written about Latin America: “There is a reason for In that article, I also showed how a chart of the
everything and it is one’s duty
to discover it.” KONDRATIEFF WAVE COUNT (ORIGINAL)
In 1946, Ralph Elliott pub- Years in which panics have occurred and will occur again
lished Nature’s Law: The Secret 1927 18 1945 20 1965 16 1981
Of The Universe, and sold the

first 1,000 copies quickly to Years of good times, high prices
Times to sell values of all kinds
financial analysts. I have of-
ten wondered whether he had 9 1935 10 1945 8 1953 9 1962 10 1972 8 1980 9
read about Nicolai Kondratieff 1980
and his cyclical theory, which
came to international attention
in Kondratieff’s 1925 book,
The Major Economic Cycles
(also translated as Long Wave
7 1931 11 1942 9 1951 7 1958 11 1969 10 1979 6 1985
Years of hard times, low prices. Good times to buy stocks, goods etc. and hold until the years of good times, and then unload
Cycle). Tragically, Kondrati-
eff’s conclusions were seen as a YearsKONDRATIEFF WAVE COUNT – PROJECTED
in which panics have occurred and will occur again
criticism of Josef Stalin’s inten- 1981 18 1999 20 2019 16 2035
tions for the Soviet economy,
causing him to be sentenced to
the Soviet gulag and ultimately Years of good times. high prices
executed in 1938. Times to sell values of all kinds
Joseph Schumpeter in his 1980 9 1989 10 1999 8 2007 9 2016 10 2026 8 2034 9
1939 book Business Cycles was

the first to use the term “Kon-
DAVID GOLDIN
dratieff waves,” which means

that Ralph Elliott could have
7 1985 11 1996 9 2005 7 2012 11 2023 9 2032 7 2039
Years of hard times, low prices. Good times to buy stocks, goods etc. and hold until the years of good times, and then unload
Figure 1: kondratieff wave charts. Here you see the standard Kondratieff wave chart going all the way back to the
by Koos van der Merwe, Cfp 1920s when Nikolai Kondratieff first wrote about it. I have projected it into the future to 2039.
+Merwe.indd 2 2/24/11 3:06:00 PM

KONDRATIEFF WAVE COUNT – ORIGINAL
11/30/10 O: 1185.70 H: 1195.90 L: 1l77.65 C: 1189.80 +6.55
Years in which panics have occurred and will occur again

2000.0
18 1999 2000 2001 2008 2019
1500.0
2016
10 8 9 1000.0
1989 1999 2007
Years of good times and high value

– time to sell values of all kinds
500.0
0.00
Analysis of STOCKS & COMMODITIES magazine

11 9 7
1996 2003 2004 2005 2009 2010 2011

2012
Years to buy stocks and hold
th approval or changes: -500.0
Figure 2: monthly chart of the s&p 500. Here you see the K-wave overlaid on the chart of the S&P 500. The chart suggests that we can expect a minor top
in 2016 with a year of panic only occurring in 2019. The correction in 2016 may not be as dramatic as the 1999 correction, but you would get out of the market in 2019
06-938-1307 • email:
and goKMoore@Traders.com
to cash.
Standard & Poor’s 500 met the cyclical turning points as sug- last a long time.
PROOF #1
gested by the K-wave, allowing an approximate year for error. In my April 2010 S&C article, I noted that my Elliott wave
I presented an Elliott wave chart of the S&P 500 showing that a chart predictions of the November 2008 article were correct.
final C-wave was in the cards, with the K-wave suggesting the However, the bottom turning-point dates were earlier than the
low in 2012. ones predicted by the K-wave. This may have been because
Figure 2 is the chart updated as of November 3, 2010. I Kondratieff was an economist, and his forecast was designed
concluded that article by noting that Alan Greenspan, the former to predict economic expansion, recession, and depression,
Federal Reserve chairman, stated that the United States was not the movement of the stock market. It is my belief that in
in a recession and it would be a mild one, but that it would today’s world, allowances must be made not only for electronic
YYears of good times, high prices
trading but also the proliferation of hedge funds. If Kondratieff
Times to sell values of all kinds were alive today, would he change his forecast and charts?
We can only speculate.
NEW for 2011: BWT PRECISION AUTO TRADER - TRADE SMARTER, TRADE AUTOMATED I still firmly believe in the Kondratieff wave theory, and the
Stop Losing and Start Winning by Keeping Your Emotions in Check 100% Automated Entry
and Exit • Forex • Futures • ETF’s • Stocks • Ninja Trader • Muliti Charts • Tradestation outcome of the recent US elections, in which the Republicans
took control of the US House of Representatives, suggests
that the US economic recovery could now be in a stalemate
if the Republicans in Congress challenge President Obama’s
policies. This is why I see a slow recovery in my charts for
the coming six years, if not longer.
History, however, has always taught me that it is far easier
to conclude a reason for an event after the event than before
the event. To quote movie mogul Samuel Goldwyn, “It is
always difficult to forecast, especially the future.”
Figure 1 is my standard Kondratieff wave chart going all
the way back to 1927, when Nikolai Kondratieff first wrote
The Most Innovative Technical Analysis Tool Available Today about it. I have projected it into the future to 2039.
Blue Wave Trading: Often Imitated...Never Duplicated Figure 2 is a standard monthly chart of the S&P 500, with
www.bluewavetrading.com • 808-281-8391 the K-wave overlaid. Note how the K-wave called for the
For more information circle No. 24 major correction in 1999, noted as “Years in which panics have
+Merwe.indd 3 2/24/11 3:06:17 PM

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Securities products and services are offered by E*TRADE Securities LLC, Member FINRA/SIPC.
System response and account access times may vary due to a variety of factors, including trading volumes, market conditions, system performance and other factors.
©2011 E*TRADE Financial Corporation. All rights reserved.

S&P 500 (1,143.49 1,196.14 1,131.87, 1,193.57, +52,3700)
CYCLES
Jan 2003
2000 2000.0
6 years
1576.09
1500.0 1500.0
on Thursday, May 6,
1193.57 1193.57
1000 1000.0
741.02
2010, something Kon-
A
C
6 years
dratieff could never
500 500.0
have foreseen.
CIRCLE X CIRCLE Y But what can

you expect for
1973
6 years
the future?
The chart suggests that
121.74 1976
98.72
86.45 we can expect a minor

A
1978 top in 2016, years of
good times and high
60.96
C
values, with a year of
panic only occurring in
2019. The correction
in 2016 may not be as
1974 2009 2015 dramatic as the 1999
correction when both
FIGURE 3: A semilogarithmic monthly chart of the S&P 500 Index. Circles X and Y show major collapses that occurred, something cycles occurred at the
you would not observe on a normal chart, but are very much there when you look at a semilogarithmic chart. Circle X shows the low A with a same time, but it would
lower low of C. The high reached was 121.74 in 1973 with the low at C being 60.96 in 1974. This is a fall of 49.93%. The market collapse shown still be a time to get out
in the second circle, from 1576.09 in 2008 to 741.02 in 2009, is a drop of 52.98%.
of the market and go
to cash.
occurred and will occur again.” It also triggered the “Years of I must now refer you to Figure 3, a semilogarithmic monthly
good times and high values sell,” which is unusual because chart of the S&P 500. The two areas you should watch are circles
the last time the two synchronized was in 1945, although X and Y. Both show major collapses that occurred, something
they were only a values
yearof allout
kinds in 1980–81. The S&P 500 took a you would not observe on a normal chart, but are very much
YYears of good times, high prices
Times to sell
nosedive with the collapse of technology stocks a year later, there when you look at a semilogarithmic chart. The first circle,
as we all remember in March 2000. circle X, shows the low A with a lower low of C. The high
The chart shows that the K-wave called for a bottom in reached was 121.74 in 1973, with the low at C being 60.96 in
2005, but as you can see, the index triggered a low in 2003, 1974. This is a fall of 49.93% — pretty nasty.
then rose into a high in July 2007 before falling to a bottom The market collapse shown in the second circle, from 1576.09
in March 2009. As I have stated previously, rapid bear market in 2008 to 741.02 in 2009, is a 52.98% drop, which is even worse.
collapses are caused by computerized short selling by traders Note how close, percentage-wise, both corrections are.
and hedge funds. As an example, we saw a scary collapse, the In circle X, it took six years for the S&P 500 to reach the
largest daily decline in the history of the US stock market, high of 121.74, the high reached in 1973 before the correction.
in a matter of 10 minutes between 2:40 pm and 2:50 pm ET Assuming that the same will occur now — and let’s face it,
the patterns in the circles look pretty similar — it could
S&P 500 (1,145.49 1,196.14 1,131.87, 1,193.57, +52,3700)
take six years for the S&P 500 to reach 1576.09, the high
of January 2008. If the trend of circle X is followed, the
index will move sideways from now on until 2015 in a
185 185
175 175
165
155 CIRCLE X
165
155
U-shaped formation, a pattern that Nouriel Roubini, the
145 145 New York University professor who predicted the global
135
6 years
135
financial crisis, is forecasting. I cannot disagree with
him, as much as I would like to. The drop from 98.42 in
125 125
Dec 1976
115 Sep 1979 115
105
98.42
105
1976 to 86.45 in 1978 was a 12.16% correction. Figure
95 95
4 shows this U-shaped correction clearly.
What this means is that we could see a 12.16% cor-
85 86.45 85
Apr 1978
75 75
U-shaped correction
65 2½ years 65 The K-wave called for
60 60
a bottom in 2005, but
the index triggered a
FIGURE 4: The S&P 500 showing the 1977–79 U-shaped correction on a monthly
chart. We could see a 12.16% correction or a figure pretty close to this over the next two years, low in 2003.
once a high has been confirmed.
+Merwe.indd 4 2/24/11 3:06:50 PM

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For more information, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure Statement for Futures and Options available by visiting
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retirement, business, trust or E*TRADE Bank accounts. Excludes current E*TRADE Securities Futures customers, E*TRADE Financial Corporation associates and non-U.S. residents.
Offer only applies to new E*TRADE Futures Accounts opened with a $10,000 minimum deposit. Account holders must maintain minimum funding in all accounts ($10,000 minus any
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addition to the $2.99 per contract per side commission, futures customers will be assessed certain fees including applicable futures exchange and NFA fees, as well as MF Global floor
brokerage charges for execution of non-electronically traded futures and futures options contracts. These fees are not established by E*TRADE Securities and will vary by exchange.
Securities and futures products and services offered by E*TRADE Securities LLC, Member FINRA/SIPC/NFA. Accounts carried by MF Global, an unaffiliated company.
TT_TRADER™ is a trademark of Trading Technologies International, Inc., an unaffiliated company.
System response and account access times may vary due to a variety of factors, including trading volumes, market conditions, system performance and other factors.
©2011 E*TRADE Financial Corporation. All rights reserved.

S&P 500 CYCLES
11/05/10 O: 1185.70 H: 1198.30 L: 1177.65 C: 1197.95 +14.70
B 1.000 (1571.76) 1600.00

ii 4.250 (1545.25)
antly accurate in their

ii
2 1500.00
iv c
a civ a
i
i iii April 2010
1400.00
0.618 (1357.86) projections, so no matter
b b
ii
ii I
2.618 (1352.10)
0.500 (1291.78) 1300.00 how the market shapes
v
iii 1v 5 3 1.618 (1233.75)
1.500 (1219.79) over the coming year,
you should use every
1200.00
i 3 1
b 1130.03 1.000 (1160.61)
4 1.618 (1115.40)
correction to add to
i 0.500 (1101.45) 1100.00
iv
0.000 (1042.26)
iv 4 a
4
the portfolio of stocks
2 0.000 (1011.81)
1 c 1000.00
ac II
you would like to own.
c
a ii 900.00
iii v b iv 2 Spread your risk by buy-
iii b i
ing small quantities of
800.00
v iii
3 v 666.80
700.00
many stocks and make
5
C
600.00 a note in your trading
March 6, 2009
500.00 journal to be cautious
RSI 12, 7, 3 -100.00 as 2016 approaches, and
SELL ZONE
move totally to cash as
2019 approaches.
50.00
BUY ZONE 37.84
Finally, the ques-
tion of inflation always
0.00
comes to mind. In the

FIGURE 5: A weekly chart of the S&P 500 with Elliott Wave Count. A weekly Elliott wave count of the S&P 500 suggests 1970s, the foundation
that the wave count is currently
YYears of goodintimes
a wave
, high 3 of wave III. Elliott wave theory has taught us that wave III must be equal to the length of wave was laid for the high
prices
I, which means that it should reach a ofhigh in five waves of 1568.61.
inflation of the 1970s
Times to sell values all kinds
and early 1980s. This

rection, or a figure close to this, over the next two years, once inflation was eventually overcome by the strategies of Paul
a high has been confirmed. And here I must refer you to my Volcker, who was appointed to the chair of the Federal Re-
Elliott wave count in Figure 5. serve Board in 1979. He holds a place in President Obama’s
A weekly Elliott wave count of the S&P 500 suggests that cabinet today, perhaps appointed to keep a watchful eye on
the wave count is currently in a wave 3 of wave III. This bullish “Helicopter” Ben Bernanke’s policy to restart the US economy.
rise is confirmed by the relative strength index (Rsi), which His strategy? Clamp down the money supply.
is not yet in the sell zone. Do note the low of March 6 was a And thus, the inflation fire that was set alight during the
final wave C, the end of the bear trend, and that the S&P 500 U-shaped correction of the 1970s should not be lit during the
is and has been in a major bull trend, with wave I and wave U-shaped correction I am anticipating over the coming years.
II complete. Elliott wave theory has taught us that wave III Paul Volcker’s watchful eye may, however, slow the market
must be equal to the length of wave I, which means that it recovery, tying it surely to the K-wave count.
should reach a high in five waves of 1568.61 as shown. Nikolai Kondratieff, an economist, was immortalized by a
Wave 3 of wave III, on the other hand, should reach a high wave theory still in force today. Bravo!
of 1219.79 or 1233.75 to equal wave 1 of wave III. Wave 2 of
wave III is a simple wave correction, which means that wave Koos van der Merwe has been a technician since 1969. He
4 of wave III should be a complicated correction, which could worked as a futures trader and as a technical analyst with a
take some time to complete. This would confirm the stagnant stock brokerage firm in Johannesburg, South Africa. Currently,
U-shaped pattern, allowing the 12% drop. There should be he acts as a consultant for a fee of $1, a charge he believes is
more upside before the correction to complete wave 5 of wave necessary because free advice usually does not carry much
III, probably until the Rsi confirms a sell signal. weight. He may be contacted at petroosp@gmail.com.
Let the good times roll Suggested reading

A look at Figure 1 shows that the economy/market should only Frost, A.J., and Robert Prechter [[1985]. Elliott Wave Principle,
start recovering in 2012. Allowing for a margin of error of New Classics Library.
one to one and a half years, the market could start recovering Kondratieff, Nikolai [1984]. Long Wave Cycle, Richardson
in 2011 and as late as 2013, although the chart in Figure 2, a & Snyder. Originally published in 1925.
monthly chart of the S&P 500 with the K-wave superimposed, van der Merwe, Koos [2008]. “My Kondratieff Wave,”
does show that bottoms are reached before the K-wave bot- Technical Analysis of Stocks & Commodities, Volume
toms shown. However, a U-shaped pattern, in a major bullish 26: November.
trend, might turn exactly on the 2012 K-wave low. _____ [2010]. “Kondratieff Wave Comeback,” Technical
Whatever the daily or weekly trend of the S&P 500 may Analysis of Stocks & Commodities, Volume 28: April.
be, the Kondratieff wave is calling for a rise into 2016 and ‡Advanced Get
2019. Figure 2 has shown us that the tops have been pleas- S&C
+Merwe.indd 5 2/24/11 3:07:06 PM

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Cyclic Theory Revealed
Hurst’s Cyclic Analysis

This crash course on an almost-forgotten theory could shed available as JM Hurst’s Cycles Course).
LIZ ADAMS
some light on how you can trade consistently and profitably. A number of enthusiastic advocates, prominent traders, and
writers proclaim Hurst as the “father of cyclic analysis” and
by David Hickson confirm the efficacy of the theory (including the late Brian
Millard, who wrote several books about Hurst’s theory), but
In
the 1970s, an American engineer named J.M. Hurst why isn’t it better known and more widely used by technical
published a thesis about why financial markets move analysts? There are two possible reasons:
the way they do. His expounded theory was the result of
n First,Hurst’s cyclic theory is not easy. While it is
many years of research, and it became known as Hurst’s
beautiful and elegant in its essence, it is not a simple
cyclic theory. Hurst claimed a 90% success rate trading
theory to understand or apply. The Cycles Course is
on the basis of his theory, and yet his work has remained
more than 1,500 pages long, and most people take
largely undiscovered and often misunderstood.
several months to work through it.
An almost-forgotten theory
n Second, although the theory presented in both the Profit
Hurst published two seminal works: The Profit Magic Of Stock
Transaction Timing, followed a few years later by a workshop- Magic book and the Cycles Course is the same, there
style course that was called the Cyclitec Cycles Course (now is a vitally important distinction between the analysis
+Hickson_Hurst Cyclic.indd 1 2/23/11 6:38:51 PM

CLASSIC TECHNIQUES
processes presented in them. Hurst claimed his suc-

The eight Principles of Hurst’s Cyclic Theory
cess on the basis of the process presented in the Cycles
Course, whereas many people read the Profit Magic
n Commonality: All equity (or forex or commodity) price movements
book and go no further, with the consequence they
have many elements in common (in other words, similar classes
never discover the more effective process presented
of tradable instruments have price movements with much in com-
in the Cycles Course.
mon)
Hurst’s cyclic theory in a nutshell n Cyclicality: Price movements consist of a combination of specific
Hurst defined eight principles which, like the axioms of a math- waves and therefore exhibit cyclic characteristics
ematical theory, provide the definition of his cyclic theory. (See
n Summation: Price waves that combine to produce the price move-
sidebar, “The Eight Principles Of Hurst’s Cyclic Theory.”)
ment do so by a process of simple addition
In essence, these principles define a theory that describes
the movement of a financial market as the combination of an n Harmonicity: The wavelengths of neighboring waves in the col-
infinite number of cycles. These cycles are all harmonically lection of cycles contributing to price movement are related by a
related (their wavelengths related by small integer values) and small integer value
their troughs are synchronized where possible, as opposed to
n Synchronicity: Waves in price movement are phased to cause
their peaks. The principles define exactly how cycles combine
APRIL 2011 • Technical
to produce a resultant price movement (with an allowance for
Analysis of STOCKS
simultaneous & COMMODITIES
troughs wherever possible magazine
some randomness and fundamental interaction). n Proportionality: Waves in price movement have an amplitude that
Perhaps the most distinguishing Please contact
feature Karen
of Hurst’s Moore with
cyclic approvalto or
is proportional theirchanges:
wavelength
theory is that it considers a combination of many cycles acting
n Nominality: A specific, nominal collection of harmonically related
simultaneously upon price, ratherphone:
than identifying and analyzing• fax: 206-938-1307 • email: KMoore@Traders.com
(206) 938-0570 waves is common to all price movements
a single cycle. One of the consequences for most cyclic theories
(which consider cycles in isolation from each other) is that cycles n Variation: The previous four principles represent strong tendencies,
often seem to “disappear.” By contrast, cycles never disappear from which variation is to be expected.
according to Hurst’s theory, although they may at times be less PROOF #1
apparent because of the way in which cycles combine.
the theory remains fundamentally the same, it is the different
Phasing analysis line of attack to the analysis that provides the key to unlock the
The analysis of financial price movements performed upon profits of the theory and delivers on the promise made in the
the basis of Hurst’s theory is referred to as a phasing analysis Profit Magic book of using cyclic analysis to truly understand
because it is a matter of determining the current phase of as the markets.
many cycles as possible. The phase of a cycle is an indication
of where that cycle is in its movement, more easily understood The Profit Magic approach
as how long it has been since the last trough. Because cycles I describe the phasing analysis approach that Hurst presented
are cyclical, if we know how much time has passed since the in Profit Magic as “mathematical,” because it requires the
last trough, we can estimate how soon the next trough will
occur, and whether the cycle under consideration is influencing
price in an upward or downward direction.
Phasing analysis is the key to working with Hurst’s cyclic
theory. There are many other important aspects to the theory
(such as the nominal model that we are working with, and
the trading methodology we apply), but at the heart lies the Advanced algorithms deliver
phasing analysis. low lag, low noise analysis.
Profit Magic vs Cycles Course

The Profit Magic book has become a classic, probably because Now featuring
it promises to help the reader understand the movements of Tools for...
financial markets. However, the book presents a form of
analysis based on a largely mathematical approach and doesn’t
result in the application of the full theory.
But in Cycles Course, the full theory is explained in detail Also for: AmiBroker, Wealth-Lab, MetaTrader, Wavewi$e, Excel, Investor/RT, BioComp Profit, NeoTicker,
Tradecision, TradingSolutions, MATLAB, TradeStation, Ninja Trader, eSignal, NeuroShell Trader, Financial
and a different approach to the analysis is presented. This Data Calculator, Genesis TradeNavigator and TradersStudio.
analysis process is the tour de force of Hurst’s work. It is an

www.jurikres.com • 800-810-3646 • 719-686-0074
irony that many enthusiastic readers of Profit Magic never
progress to a study of the Cycles Course, because although For more information circle No. 25

Hurst’s cyclic theory is a
powerful analytical tool that
can lead to consistently
profitable trading decisions.
plotting of several calculated displaced moving

averages that are inflated to create constant depth
channels around price called Hurst envelopes.
These channels are nested, and where they
Three nested channels provide clues approach one another (or themselves form a
to the positioning of cycle troughs when
trough in their shape), a trough of the cycle
Sentient Trader
they approach one another or form

troughs themselves (on which the channel is based) is positioned
(Figure 1).
Figure 1: phasing analysis using nested channels. These channels are nested, and where This provides a basic phasing analysis,
they approach one another (or themselves form a trough in their shape), a trough of the cycle (on which and then moving averages are used to create
the channel is based) is positioned.
projections. Because the moving averages
are displaced back in time, they need to be
extrapolated forward to points of intersection
Intersections of displaced moving averages are plotted
as triangles. The orange lines show the projections, that provide the projections for future price
calculated from a previous price extreme, through the movement. Figure 2 illustrates how well these
intersection and an equal distance beyond projections work with the benefit of hindsight.
Figure 3 demonstrates the potential weaknesses
of the approach.
So two vital conditions must be met for this
process to work for a trader (without the benefit
of hindsight):
n The market needs to be exhibiting well-

defined cyclic action (which is a conse-
quence of the total cyclic picture)
n The projections are only as good as

the accuracy of the extrapolation of
Figure 2: creating projections. During periods of well-defined cyclic action in the market, the the moving averages.
intersections of displaced moving averages provide good price projections.
There are times when these conditions are
met and the process works well, but there are
also times where the conditions are not met.
And so this process doesn’t begin to tap into
the true power of Hurst’s cyclic theory.
Here the moving averages Phasing analysis

are projected beyond their in Cycles Course
known values. Projected
intersections are subject In Cycles Course, Hurst ad-
to error vocated a different analytical
approach, a process that is
simple in essence and based
upon a form of pattern rec-
ognition and the application of an advanced
Multiple intersections here (hopefully) human brain to the resolution of
are confusing and difficult
to interpret complex dilemmas. The pattern recognition
approach involves three stages:
Entry stage: First of all, the analyst identifies

Figure 3: It does have its weaknesses. During periods of less well-defined cyclic action in the
market, the intersections of displaced moving averages provide very poor price projections (and yet the
major troughs (“visually evident” troughs be-
cycles are still active). cause they can be seen clearly) of the longest

CLASSIC TECHNIQUES 1300
1278.50
Semi-circles making 1250.00
the phasing analysis 1250.00
easier to visualize 1250.00
cycle that appear to be present in the data 1100.00
(Hurst called this the dominant cycle). If a

1150.00
Circles with “whisker” 1000.50

particular expected trough is not apparent, lines indicate the 950.50
or there is ambiguity in the positioning of range of time for next 900.00
expected trough
the trough, the positioning of this trough 850.00
is postponed until the analyst has more Hollow diamonds 800.00
detailed information. are possible,uncon- 750.00
firmed troughs
A trough of the A trough of the
Extension stage: The analyst then considers 40-week cycle 18-month cycle
the next shorter cycle in the cyclic model and
identifies the troughs of that cycle using the
previously positioned troughs of the longer
cycle as anchoring points. The positioning
of shorter cycle troughs often resolves the Figure 4: DIAMONDS IN THE TROUGH. This full phasing analysis presents the complete cyclic picture using
Hurst’s diamond notation for marking the positions of troughs. Cycles should never be considered in isolation
positioning of the longer ones, and so the when using Hurst’s cyclic theory.
analyst is constantly moving between the
cycles but moving from the longest (domi- These two cycles (20-week and
nant) cycle down to the shortest cycle. 40-week) are moving down 1278.50
and will distort the price over 1250.00
the next 80-day cycle downward
Completion stage: Having resolved the 1200.00
shortest cycle visible in the data (the five-
day cycle if the trader is working with daily 1150.00
data), the analyst reverses the direction of
the process and resolves the position of all
1100.00
the longer cycles. 1050.00

It is this different approach that provides
the true key to Hurst’s cyclic theory be- 1000.00
cause it presents a complete cyclic model; The 80-day cycle trough

it informs the analyst of the phasing of all is expected soon
known cycles, not merely the phasing of
one or two. By understanding the complete
picture (as complete as possible, given limi-
tations on available data), the analyst can
trade according to how the cycles combine Figure 5: a forecasting tool. A trough of the 80-day cycle is expected soon. However, this does not
to influence price. mean that the market will rise for 40 days! Longer cycles are pressing down, and so the rise out of the 80-day
Having performed a phasing analysis, the cycle trough is likely to be brief and disappointing.
results are plotted on a chart using a notation
system proposed by Hurst involving the
placing of diamonds beneath the price to represent the troughs Millard, Brian [1984]. Channel Analysis, Quodos Publications,
of the various cycles. The higher the pile of diamonds, the distributed by John Wiley & Sons.
longer the cycle that is forming a trough at that point (Figure _____ [1997]. Profitable Charting Techniques, 2d edition,
4). So what can we expect going forward? Take a look at John Wiley & Sons.
Figure 5. _____ [1999]. “Moving Averages, First Principles,” Techni-
As presented in Cycles Course, Hurst’s cyclic theory is a cal Analysis of Stocks & Commodities, Volume 17:
powerful analytical tool that can lead to consistently profitable February.
trading decisions. I hope this article will encourage you to ‡Sentient Trader
explore further and embark upon a journey that could change ‡See Editorial Resource Index
the future course of your trading in a profitable way.
David Hickson is the creator of Sentient Trader, software that

analyzes and trades financial markets, according to the full
cyclic theory of JM Hurst.
Suggested reading
Hurst, J.M. [1970]. Profit Magic Of Stock Transaction Tim-
ing, Prentice-Hall. S&C

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A Look From The Measured Side
Engineering Look At Cycles

Do cycles exist in markets? Here’s a look at the markets Technical analysts determine cycles in time series using
ROY WEIMANN
from a different angle — one that will help you realize the following major methods:
that there is a harmony among cycles, events, and market
n Descriptive statistics
behavior.
n Visual analysis of charts
by Arthur Zernov
n Trigonometric methods (centered simple moving aver-
The existence of cycles in stocks and commodities prices

is considered to be an acceptable and rarely debated
age and future lines of demarcation (Fld) developed
by J.M. Hurst, the focal point method by Jim Tillman,
topic. While preparing for the Chartered Market Technician and so forth)
(Cmt) tests, I became interested in this subject and decided n Traditional indicators such as the moving average
not to take their existence for granted but to investigate it convergence/divergence (Macd), stochastic oscilla-
myself. In this article I will attempt to answer the ultimate tor, the slope, and so on.
question: Do cycles exist?
+1104 Zernov_Engineering.indd 1 3/3/11 3:13:15 PM

Hurst Tarkany Garrett I will attempt
20 days 15 days (3 weeks) 2 weeks
to answer
40 days 6-7 weeks
the ultimate
By no means are these the only methods 80 days 12 weeks 10 weeks
question: Do
used, but they are the most common. Different 26 weeks 22-23 weeks 25 weeks
analysts found different durations for market 52 weeks
cycles exist?
cycles, as can be seen from Figure 1. Figure 1: MARKET CYCLE DURATIONS
The engineering twist

There appears to be no consensus on Spectrum
the durations of the cycles. So who is
right and who is wrong? What cycles
do we actually have if we have them
Bars
at all? To answer these questions, I de-
cided to try a scientific approach with
an engineering twist. First, I employed
the nullification hypothesis: There are
MICROSOFT EXCEL
no cycles in market price data. Yes,
I denied there are cycles until proven
otherwise. If my hypothesis is correct, Amplitude in dB 6–9 3–6 0–3 Date
I won’t be able to detect cycles using
Figure 2: S&P 500 weekly spectrum (October 2009–September 2010). Here you can see the 16- to
the mathematical methods used in 17-week cycle. This translates into an 80- to 85-day cycle.
electronic engineering to detect sig-
nals. If the hypothesis is incorrect, then
these discrete time signal processing Spectrum
methods should work.
To verify this hypothesis I will use
a spectrum analyzer based on the one
described by Mesa Software’s John
Bars
Ehlers, a frequent Stocks & MARCH Com- 2011 • Technical Analysis of STOCKS & COMMODITIES magazine
modities author. For those who like
mathematics and engineeringPlease and contact Karen Moore with approval or changes:
are interested in learning how digital
signal processing works, I recommend
checking out Discrete-Time Signal phone: (206) 938-0570 • fax: 206-938-1307 • email: KMoore@Traders.com
Processing, listed in “Suggested read-
ing.” It is not the only book out there Amplitude in dB 6–9 3–6 0–3 Date
on this topic, but it is one I have kept FIGURE 3: S&P 500 daily spectrum (July 2010–September 2010). Here the 80-day cycle has been detected.
since my university days. Its period is identical to a 16-week cycle.
PROOF #1
Without going into details on the
internals of the spectrum analyzer, I will mention the one I
built had a high-pass filter for detrending, a low-pass filter for
smoothing, and bandpass for selecting the range of frequen-
cies (cycle periods) of interest. Ehlers wrote a comprehensive
article for traders on this topic.
I built the analyzer software using Visual Basic for applica-
StockSpotter.com VERSION
By John F. Ehlers
tion in Excel. I did so because I did not want to get stuck with
any trading platform limitations and peculiarities. The program
analyzes the data and plots relative strength and duration of the
detected cycle as a surface graph. The time progresses horizon-
tally and the cycle period is plotted along the vertical axis.
Taking the most current weekly price data for Standard & Actionable Trading Signals With Timing
Poor’s 500 and plotting data from October 2009 to September
All Results Are Tracked And Verifiable
10, 2010, I got the graph you see in Figure 2.
It is perfectly clear the cycle period with a duration of 16 to S&C readers PROMO CODE: TASC358
17 weeks has been detected and it has been fairly stable. If we
have a cycle of that duration, then it should translate into a cycle
of 80 to 85 days. To test this idea I took daily bar data and ran
it through the program (Figure 3). I got what I expected. For more information circle No. 16

CYCLES
Applying it to other markets

Spectrum
To prove that it is not only the S&P 500
that exhibits this phenomenon, I added
some Canadian sizzle and scanned the
weekly data of the Toronto Stock Ex-
change (Tsx). As you can see in Figure
Bars
4, the 16-week cycle was present in the
Tsx as well. The analyzer determined
that the larger cycle of about 22 weeks
became stronger than the 16-week one at
the beginning of August 2010. I interpret
this to mean we can rely on existence
Date Amplitude in dB 6–9 3–6 0–3
of cycles, but we cannot rely on their
FIGURE 4: TSX WEEKLY SPECTRUM (OCTOBER 2009–SEPTEMBER 2010). The 22-week cycle became strength. At certain points they weaken
dominant starting the second week of August 2010. and get replaced by others. To make
matters more complicated, even when
Spectrum a cycle is dominant, its period could vary. In other words,
cycles are not stationary.
The Tsx weekly spectrum you see in Figure 4 is a good example.
The period of the same cycle was fluctuating between 18 and 15
weeks. Or perhaps I should say that the sinusoidal approximation
of the cycle was interpreting the price data that way.
Can it be used to detect crises?

I wanted to revisit the markets prior to the mortgage crisis
of 2007 and apply the same technique. There are different
opinions on how we could have predicted the bear market
of 2008–09 sooner. If this method worked, it could have
warned us about the troubles ahead.
AmplitudeMany cycle specialists believe that the business cycle dura-
in dBtion is from four to six years. I scanned the monthly bars of
6–9the S&P from the end of 2003 to the end of 2007 to validate
3–6this statement (Figure 5).
Date in dB 6–9 3–6 0–3
Amplitude
0–3 The picture is definitely more complex than expected. It
FIGURE 5: S&P 500 MONTHLY SPECTRUM (OCTOBER 2003–DECEMBER seems as if there was a larger cycle that was responsible for
2007). The 106-month (8.8 years) cycle became dominant starting April 2007. the bull run from the second part of 2004 till mid-2007. This
method has detected its period as 6.7
Spectrum years. Then something happened at
the beginning of 2007: Another cycle
became stronger. That cycle was 106
months (8.8 years) long.
Since the cycle period is normally a
multiple of 2 or 3, I tried scanning for
a cycle with a period of three to five
Period in bars
years to see if any new cycle popped

up around the same time. By going
lower in period (higher in frequency),
I saw that something new was born.
Amplitude This new cycle was about 53.5 months,
Amplitude
inindB or 4.4 years long (Figure 6).
dB
6–9
By reviewing these scans, it is
6–9
3–6 possible to conclude that our trusted
3–6 cycle of 6.7 years got weaker and two
0–3
0–3
Date new cycles of 106 and 53 months got
FIGURE 6: S&P 500 MONTHLY CHART (OCTOBER 2003–DECEMBER 2007). This scan demonstrates a cycle with stronger. The existence of eight-year
a period of 53 months that is twice as short as the larger one of 106 months. cycles has been mentioned in technical

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TASC_p-tasc_02_17_11.indd 1 2/23/11 2:01 PM

90
Can we say CYCLES
for certain
that cycles
exist? Not go up or down. There are a few ways to do so. One way is to
use simple moving averages on monthly bars of the period
180 0 yet. But equal to half of the one we are interested in. I will discuss that
we can later. First, I will take a different approach.
declare the Since I assume that our signal is a sinusoid — that is,
statement
(y(t) = A*sin(ω*t+φ))
270 they don’t
FIGURE 7: CYCLE PHASES IN DEGREES. Here exist is I can exploit the fact that every sinusoid can be expressed
you see that 90 degrees represents the top and incorrect. as the sum of a sine function (in phase) and a cosine function
270 the bottom.
(quadrature). When you pass the signal through the bandpass filter,
you obtain its real and imaginary parts (in phase
Spectrum and quadrature). By knowing these two parts of
the signal (sine and cosine), you find the phase
of the cycle by simply inversing sine and cosine
51
and accounting for a phase shift of low-pass and
high-pass filters of the spectrum analyzer.
After all these calculations, you find out that the
phase of the 106-month cycle was 88 degrees by
Bars
45 the end of 2007. Taking onto account that the cycle
top is 90 degrees (Figure 7), we can conclude that
this 8.8-year cycle top was about to be reached
or had already been reached, depending on how
much smoothing was applied.
39 Now let’s move the clock forward and see what
was going on in 2008. From Figure 8 you can see
6
8
/06
/07
/08
1/0
0/0
1/0
1/0
1/0
that the dominant cycle became even shorter: 42

/30
/30
/28
7/3
3/3
7/3
3/3
7/3
11
11
11
Amplitude in dB 6–9 3–6 0–3 months or 3.5 years. By the end of March 2008
FIGURE 8: S&P 500 MONTHLY CHART (2006–08). A new dominant cycle of 42 months became visible
its phase was 83 degrees. This suggested it was
from March 2008. By the end of March 2008 its phase was 83 degrees. This indicates that it was the last the last warning to exit the market if you had not
warning to exit the market. By the end of December the phase was 182 degrees. done it yet. By the end of December, its phase
progressed to 182 degrees.
analysis literature, so our 106-month cycle seems realistic. Of To remind you about what happened in 2007 and 2008 with
course, its estimated period would vary slightly, depending on the S&P 500, I included the candlestick weekly price chart
how the spectrum analyzer filters were tuned. (Figure 9). I also plotted simple moving averages of half and
It would be nice to know what phase that cycle was in by one-eighth of the cycle period. Since Sma is easy to under-
the end of 2007. Naturally, out of curiosity I think it would stand, this demonstrates that any basic Sma-based systems
be enlightening to establish whether the cycle was going to (crossovers or prices moving above/below) would warn you
about the dominant cycle going
down if the period was determined
correctly. The periods I took in this
example were 90 and 22 weeks:
Period = 42 months ≈ 180 weeks
Sma 1 period = Period/2

= 90 weeks
Sma 2 period = Period/8

≈ 22 weeks
As you can see from Figure 9, the

STOCKCHARTS
mentioned Sma methods would tell

you to exit all long positions and
go short if the correct period was
FIGURE 9: WEEKLY CHART OF S&P 500 (2007–08) WITH SMAs. Price crossed SMA(90) in January 2008 and stayed
below it. The crossover occurred in March 2008. The SMA(90) sloped down in June 2008, indicating that the cycle top used. I only used monthly data to
occurred 45 weeks ago in July 2007. identify the dominant cycle in this

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CYCLES
example. I did not go deeper into shorter cycles,

momentum, and so on. Just by scratching the Spectrum
surface, I already got a result.
48
Can it forecast price moves?
I will review what is happening at the time I
am writing this article by moving our clock to
Bars
42
the beginning of September 2010.
The spectrum in Figure 10 reveals that as of
the end of August 2010, the same 42-month 36
cycle is still dominant. Its period did not re-
/06
/07
/08
/09
0
1/0
0/0
1/0
1/0
1/0
1/0
1/0
1/1
0/1
/30
/30
/28
/30
ally change (41.48 months), and its calculated
7/3
3/3
7/3
3/3
7/3
3/3
7/3
3/3
7/3
11
11
11
11
phase is 31.2 degrees. Since I am using weekly Amplitude in dB 6–9 3–6 0–3
data now up until September 10, 2010, I will
calculate how this cycle looks on weekly bars. FIGURE 10: S&P 500 MONTHLY (JULY 2007–AUGUST 2010). As of the end of August 2010, the
Its period is 167 weeks and its phase is 63.7 42-month cycle is still dominant, which is the same dominant cycle as in spring 2008. Its calculated phase
degrees. To me, this is a sign of caution even
is 31.2 degrees.
without looking into shorter cycles

and momentum indicators.
If I go below a period of 160
weeks, the spectrum analyzer will
reveal another cycle with a period
of 106 weeks. Though its strength
is weaker than that of 42 months, it
is much stronger than the 16-week
cycle. If that cycle continues to
strengthen, it would mean that the
S&P 500’s April 2010 high was the
42-month cycle top. Otherwise, the
market will resume its uptrend. For
STOCKCHARTS
now, we can plot Smas using this
new cycle and use it as a warning
line (Figure 11). FIGURE 11: WEEKLY CHART OF S&P 500 (2009–SEPTEMBER 2010) WITH 13- AND 53-WEEK SMA. Price action
The periods used are 53 and 13 is going above and below 53 weeks SMA. The crossover of the two moving averages occurred in July 2010.
weeks as half and one-eighth of
the cycle period. If you translate
this into days, which you probably already have, you will was just a peek through the keyhole, and it led to discovering
see these periods are almost identical to the commonly ac- why one of the most popular Sma combinations often works.
cepted 200- and 50-day Smas. The popularity of using these I hope you are intrigued now as I am.
two Smas in technical analysis is more understandable and
perceptible. Arthur Zernov is a private investor and technical analysis
consultant. He has been a member of the Market Technicians
Do cycles exist? Association (Mta) and the Canadian Society of Technical
I went through this exercise to falsify the initial nullification Analysts (Csta) since 2009. He can be reached at arthur_zer-
hypnosis, which is that there are no cycles in market price nov@yahoo.com.
data. But can we say for certain that cycles exist? Not yet.
But we can declare that the statement that they don’t exist is Suggested reading
incorrect. We also recognized that sinusoidal approximation Ehlers, John [2008]. “Measuring Cycle Periods,” Techni-
is a good method of looking at market data to identify peaks cal Analysis of Stocks & Commodities, Volume 26:
and troughs. This approximation produces cyclical sinusoids March.
that are not stationary. They can expand and contract in their Kirkpatrick, Charles D., and Julie R. Dahlquist [2006]. Techni-
periods, but what is more interesting is that their amplitudes cal Analysis: The Complete Resource For Financial Market
become stronger or weaker at certain times. Technicians, FT Press.
These observations open a door to an intriguing quest to Oppenheim, Alan V., and Ronald W. Schafer [1988]. Discrete-
understanding markets from a different angle — an angle of Time Signal Processing, Prentice Hall.
harmony among cycles, events, and market behavior. This ‡StockCharts ‡Microsoft Excel S&C

FUTURES FOR YOU
INSIDE THE FUTURES WORLD
Want to find out how the futures markets really work? DeCarley Trading senior analyst
and broker Carley Garner answers your questions about today’s futures markets.
To submit a question, post your question at http://Message-Boards.Traders.com.
Answers will be posted there, and selected questions will appear in a future issue of
S&C. Visit Garner at www.DeCarleyTrading.com. Her books, Commodity Options
and A Trader’s First Book On Commodities, are available from FT Press.
Carley Garner
Speculating in silver holdings in Slv will likely be required Silver futures and options: Comex
I want to speculate in silver, but I don’t to pay interest to their brokerages for the (Commodity Exchange, a division of the
have the margin or the risk tolerance for borrowed shares. In addition, Etfs are Cme Group) requires a trader to have
futures. Is there a better way? only tradable about nine hours per day, $10,056 in his or her account to hold one
Speculation in silver is challenging but asset values are fluctuating for 24! full-sized silver futures contract over-
in many ways, and recent volatility has Determining market direction and night. If you aren’t familiar with silver
magnified the risks. There are essentially timing is difficult enough; adding interest futures, one contract represents 5,000
four ways to speculate in silver prices: charges makes it worse for traders. The troy ounces of silver and equals a $50
exchange traded funds (Etfs), foreign drawbacks of Etfs is in contrast to the profit or loss per penny of price move-
exchange, futures (including options advantages of trading silver futures. ment. In some months it isn’t uncommon
on futures), and bullion. However, there for silver to move $0.50 in a single trad-
are few I would feel comfortable recom- Silver in FX: US–based futures and forex ing session, and not many retail traders
mending to most retail traders, simply firms must register with the National are willing to stomach swings of $2,500
because they have certain drawbacks. Futures Association and due to recent ($50 x $0.50) per contract per day. As a
Nonetheless, I’d like to provide a quick regulation cannot provide clients with result, they look to the option market for
overview of the realities and allow you access to silver and gold via a forex ac- a venue in which to speculate.
to decide for yourself which might be count. In my opinion, if US regulators However, they may be better off look-
best for you. One thing is for sure: there have gone as far as to say these products ing elsewhere. Silver option traders face
is no such thing as easy money when it shouldn’t be offered to US clients by US such wide bid/ask spreads that it seems
comes to trading silver. brokerage firms (of course, traders can nearly impossible to profit. In addition
open overseas accounts), it’s probably to a liquidity problem, the options tend
Silver Etfs: The popularity of Etfs is best to steer clear. For an entire product to be overpriced, forcing long option
soaring, and along with it has come the to be eliminated, red flags are waving. traders to bet the farm, or settle on deep
advent of specialized Etfs aimed at hot out-of-the-money options.
commodity markets such as gold and Silver bullion: Owning “stuff” has its The solution? I like the idea of mini
silver. Some silver Etfs are made up of appeal. However, as a bullion holder you silver futures; they are one-fifth the size
silver mining companies rather than the will need space in your home or garage, of the original contract and allow the
shiny metal itself and subject to price or deal with storage and insurance fees. trader to speculate with a lower level of
changes tied to company, industry, or Many bullion dealers charge little in leverage. Each penny of price movement
market-specific risks. Thus, they aren’t commission for brokering the bullion is worth $10 to a mini futures trader, so
a pure speculation on silver prices. So deal, but they aren’t working for free. a 50-cent day would be equal to $500
unless your interest lies with the miners Bullion dealers charge investors a large — more tolerable than $2,500. And
themselves, this seems like a relatively bid and ask spread when buying or selling unlike Etfs, mini–silver futures traded
unappealing option for a silver trader. metals; I’ve seen the price vary by $2 or on the Nyse–Liffe exchange (the Cme
But there are silver Etfs based solely $3 per ounce from the assumed spot price Group version of mini silver is illiquid)
on the price of the metal, such as the or nearby futures price, which should be are available for trading nearly 22 hours
popular Slv; Slv shares are backed by figured into transaction costs. per day; there are no interest charges for
10 ounces of silver. Buy & hold investors So if an investor has to pay $30 per leverage or selling short, and there are
might find this to be a viable vehicle, but ounce for silver bullion but could buy certain tax advantages for those holding
those looking to speculate on the short it in a nearby expiring futures contract positions for less than a year. On the
side should look elsewhere. at $27, the dealer will come out ahead. other hand, futures are highly leveraged
Trading Slv from the short side Also, if you want to keep your silver vehicles and it is human nature for some
involves borrowing shares and paying on hand, you will pay a hefty shipping to overindulge in risk. Futures are not
interest to a brokerage firm to do so. and handling bill along with finding suitable for everyone.
Similarly, traders looking for leveraged storage space. S&C
+1104_Garner_FuturesQA.indd 1 2/24/11 9:23:22 AM

CHART PATTERNS
Simple Yet Effective
Identifying Cup Formations Early

Here’s a simple mechanical recognition
method for identifying possible emerg-
ing cup formations.
by Giorgos E. Siligardos, PhD
my article “Identifying The
In Cup (With Or Without The

Handle),” which appeared in
the February 2006 Stocks
& Commodities, I introduced a simple
mechanical algorithmic method for
identifying cup formations (also known
as rounding bottoms) in their late phase.
The core part of the algorithm was based
on the idea of using a virtual grid on the
chart. Since then, I have been asked by
technical analysts to provide an algorithm
for identifying possible cup formations
in their early phase. This time I will
show you how you can easily use the
grid technique for spotting possible cup
formations during their development.
The cup formation

In Figure 1 you can see a typical cup
formation. I will not elaborate on the
technical details of the cup formation
(see “Related reading”). I will say that
the identification method I introduced
in my previous article on the subject
was able to spot cup formations in their
late phase (to the right after point C in
Figure 1). The goal of the algorithm I
will describe is to identify the develop-
ment of such a formation before or near
point C. “But are you sure a cup is be-
ing formed at point C?” you might ask.
No, we are not. We can’t be sure that a
specific formation is going to take place.
However, if the price is about to form
a cup, it has to form a half-cup before
integrating the formation in its entirety.
You might want to be informed that the
price shows such intentions.
The semi-cup formation

Since we seek early identification of a
INGA POSLITUR
possible cup (and particularly for the

bottom phase of a possible cup), we es-
sentially seek a pattern I will refer to as a
+1104 Siligardos_New.indd 1 3/3/11 2:54:02 PM

F Directional movement Directional movement
A D (simple smoothing) >25 (simple smoothing) <25
Ptop
E “semi-cup.” The typical
Price
semi-cup formation is L4
like a completed cup cut
B C in half. This formation L3
has a distinct advantage
Figure 1: A textbook cup formation. This over an integrated cup: L2
is the typical cup formation.The price declines (seg-
ment A-B), lands low smoothly, and remains there
The price is relatively
for a while (segment B-C), and in the sequence it low and there is room L1
advances to where it was before the fall (segment for a prosperous upward Box
height
C-D), creating a cup-like formation. Often, it then movement (even when Pbot
falls back creating what is called “the handle of
the cup” (segment D-E) before moving on to new
the overall long-term B0 B1 B2 B3 B4
Box length
B5
highs (segment E-F). trend is bearish). In ad-

dition, most of the time, Figure 2: the algorithm in visual terms. The candlesticks in this chart are
it is easy to set a profit objective (price target) and a stop-loss created using the natural logarithms of open, high, low, and close (FilC) prices. The
price movement between B0 and B5 is considered a semi-cup formation when there
level when trading the formation. exist at least 20 bars; no values of FilC lie inside the yellow boxes, the directional
movement index of FilC between B0 and B2 is greater than 25 and the directional
The algorithm movement index of FilC between B2 and B5 is lower than 25.
Consider the price movement illustrated in Figure 2. The close
of the leftmost candlestick is the highest closing price among averages of DX+ and DX-, respectively.
the closing prices of all the other candlesticks shown. This DX+ = Max(FilC – FilC-1,0)
movement created a nice semi-cup formation. To instruct a
DX- = Max(FilC-1 – FilC,0)
computer program on how to recognize it, we can define a grid
FilC-1 stands for the previous value of FilC
that will cover the price plot and demand specific conditions
to be met. The basic identification algorithm consists of five
The DX(n) is basically a simplified version of J. Welles
steps, each described below (use Figure 2 as a reference):
Wilder’s directional index using the FilC instead of the closing
Step 1: Let FilC denote the natural logarithm of the clos- price and simple smoothing instead of exponential smooth-
ing price of each candlestick. ing. The mathematically inclined will notice that the DX(n)
Step 2: Let B0 be the time value of the first candlestick is essentially a composition of Wilder’s directional index
and Ptop be the FilC price of it. Let B5 be the last and relative strength index (Rsi): the higher the DX(n), the
time value shown and Pbot be the lowest FilC price stronger the directional movement of the closing price (either
between B0 and B5. up or down) in the last n bars.
Step 3: Define L1, L2, L3, L4 and B1, B2, B3, B4 in Step 5: Calculate the value of DX(2*Boxlength) at
such a way that L1, L2, L3, L4 divide the price span B2 and name it DX1. Calculate the value of
between Pbot and Ptop in five equal parts and B1, DX(3*Boxlength) at B5 and name it DX2. DX1 then
B2, B3, B4 divide the time span between B0 and B5 shows the magnitude of the directional movement
in five equal parts. of the price between B0 and B2 and DX2 shows
the magnitude of the directional movement of the
Steps 1 through 3 define a 5x5 grid (hereafter referred to price between B2 and B5.
as “window”) and create 25 rectangular boxes, with each one
having the height (Boxheight) equal to (Ptop-Pbot)/5 and a Now that we have defined a grid that encompasses the forma-
length (Boxlength) of (B5/B0)/5. tion and we have a tool to measure the strength of directional
The following steps involve the conditions that must be movement, we are ready to state the required conditions for
met in order to consider price movement inside the grid as the semi-cup. First, we want to concentrate on serious cases
semi-cup. so we will demand the semi-cup to contain at least 20 bars.
Second, since the semi-cup formation is like a fishing hook, we
Step 4: Define DX(n) to be the n-period directional index will demand that no closing prices lie inside the yellow boxes
of FilC with simple smoothing. More precisely, of Figure 2. Third, we will demand the trending character of
define DX(n) as: the price between the left and right parts of the formation to
be different. For this, we will demand a DX1 greater than 25
DX+(n) – DX-(n) and a DX2 lower than 25. In summary:
DX(n) = • 100
DX+(n) + DX-(n)
Step 6: The price is said to have formed a semi-cup pattern
where:
inside the window when the following hold:
| • | stands for the absolute value
1 The time span between B0 and B5 is at least 20 bars
DX+(n) and DX-(n) are the n-period simple moving

CHART PATTERNS
2 No values of FilC lie inside the yellow boxes Choosing the

(see Figure 2) chart periodicity
The classic cup pattern as presented in
3 DX1 > 25
technical analysis literature is a medium- to
4 DX2 < 25 long-term formation that lasts from a few
weeks to a several months. The recommended
Choosing the time span chart periodicity for the algorithm is either
The algorithm requires that the leftmost closing price of the daily or weekly, but you can use it in charts
window is the highest among all closing prices contained in of any periodicity (even intraday charts) if you wish. It is also
the window. To implement it in a chart, you can start with the important to note that the algorithm uses closing prices (not
last candlestick and move backward in time until you find a high or low prices), so the periodicity indeed is crucial for
candlestick having a closing price greater than the closing the outcome of the algorithm. For example, it may identify a
price of the last candlestick multiplied by a predefined factor. semi-cup formation in a weekly chart but it may not identify
This factor (which I will refer to as “parameter”) should be the same formation when applied to the daily chart of the
greater than one. Parameters from 1.5 to 5 will generally do same tradable. Position traders should use the algorithm in
a pretty good job. both daily and weekly charts.
SEMI-CUP ALGORITHM FOR METASTOCK

Open the MetaStock Indicator Builder and create two new indicators FilC,0),2*boxlength))*100;
DSX2:=Abs(Sum(Max(FilC-Ref(FilC,-1),0),3*boxlength)-
named “S&C – IsSemiCup” and “S&C - IsSemiCup-plot.” The formulas Sum(Max(Ref(FilC,-1)-FilC,0),3*boxlength))/(eps+Sum(Max(FilC-
for these indicators are given here. To apply the “S&C – IsSemiCup” Ref(FilC,-1),0),3*boxlength)+Sum(Max(Ref(FilC,-1)-
indicator in a chart, you must first insert the parameter. The S&C – Is- FilC,0),3*boxlength))*100;
SemiCup then returns a constant number. If this number is zero, then
{Conditions}
no semi-cup formation is identified. If the number is greater than zero, isSemicup:=
then a semi-cup formation is identified and this number shows the dura- {1}(semicupperiod>=20)
tion (in trading bars) of the formation. Once the formation is identified, AND
you can then apply the S&C - IsSemiCup-plot indicator with the same {2} (Ref(DSX1,-(b5-b2))>25)
AND
parameter to visualize it. The results of these indicators always refer {3} (DSX2<25)
to the last semi-cup formation of the chart. These indicators cannot be AND
used for backtesting the algorithm or show historical formations. {4}(Cum(If(Cum(1)>=b2, FilC>L3,0))= 0)
AND
-------------------------------------------- {5}(Cum(If(Cum(1)>=b4, FilC>L2,0))= 0) ;
BASIC CODE
-------------------------------------------- --------------------------------------------
FilC:=(Log(C)); S&C - IsSemiCup
eps:=0.0000000001; --------------------------------------------
{Giorgos E. Siligardos, 2009}
{Basic Definitions} {Basic Semi-Cup Identification Algorithm}
semicupperiod:=LastValue(Max(BarsSince(C>=LastValue(C*paramet
er)),1))+1; {parameter}
Ptop:=LastValue(HHV(FilC,Semicupperiod)); parameter:=Input(“parameter”, 1, 100,2);
Pbot:=LastValue(LLV(FilC,Semicupperiod)); <insert BASIC CODE here>
boxheight:=LastValue(Abs(Ptop-Pbot)/5); LastValue(isSemicup*semicupperiod);
boxlength:=LastValue(Max(Int(semicupperiod/5),1));
--------------------------------------------
{Grid Nodes} S&C - IsSemiCup-plot
b0:=LastValue(Cum(1)-semicupperiod+1); --------------------------------------------
b5:=LastValue(Cum(1)); {Giorgos E. Siligardos, 2009}
b1:=LastValue(Min(b0+boxlength,b5)); {semi-cup curve}
b2:=LastValue(Min(b1+boxlength,b5));
b3:=LastValue(Min(b2+boxlength,b5)); {parameter}
b4:=LastValue(Min(b3+boxlength,b5)); parameter:=Input(“parameter”, 1, 100,2);
L2:=Pbot+2*boxheight; <insert BASIC CODE here>
L3:=Pbot+3*boxheight; {plot}
LastValue(issemicup)*(ValueWhen(1,LastValue(isSemi
{Directional Strength} cup)*Cum(1)=b0,1)*((Exp(Ptop)-Exp(Pbot))/Power(b0-
DSX1:=Abs(Sum(Max(FilC-Ref(FilC,-1),0),2*boxlength)- LastValue(Cum(1)),10)*Power(Cum(1)-LastValue(Cum(1)),10)+0.98*
Sum(Max(Ref(FilC,-1)-FilC,0),2*boxlength))/(eps+Sum(Max(FilC- Exp(Pbot)));
Ref(FilC,-1),0),2*boxlength)+Sum(Max(Ref(FilC,-1)-

METASTOCK EXPLORATION FOR SEMI-CUP FORMATION
Open The Explorer and create a new exploration named “S&C D:
– SemiCup Exploration” using the formulas shown here. The Col. Name: 3.0
Formula :
exploration reports all securities who have at least one semi-cup {parameter}
formation under way for parameters from 1.5 to 5 with a 0.5 step. parameter:=3.0;
Be sure that many price data are taken into account for each <insert BASIC CODE here>
exploration (to be sure, go to Exploration Options and instruct LastValue(isSemicup*semicupperiod);
MetaStock to always load 30,000 records). After performing a E:
scan, the results will be similar to those shown in Figure 9. Col. Name: 3.5
Name: S&C – SemiCup Exploration Formula :
{parameter}
Notes: {Giorgos E. Siligardos , 2009} parameter:=3.5;
{Basic Semi-Cup Exploration} <insert BASIC CODE here>
LastValue(isSemicup*semicupperiod);
Filter: ((colA>0) OR (colB>0) OR (colC>0) OR (colD>0) OR
(colE>0) OR (colF>0) OR (colG>0) OR (colH>0)) F:
AND (Lowest(L)>0) Col. Name: 4.0
Formula :
A: {parameter}
Col. Name: 1.5 parameter:=4.0;
Formula : <insert BASIC CODE here>
{parameter} LastValue(isSemicup*semicupperiod);
parameter:=1.5;
<insert BASIC CODE here> G:
B: Col. Name: 4.5.0
Col. Name: 2.0 Formula :
Formula : {parameter}
{parameter} parameter:=4.5;
parameter:=2.0; <insert BASIC CODE here>
<insert BASIC CODE here> LastValue(isSemicup*semicupperiod);
H:
Col. Name: 5.0
C:
Col. Name: 2.5
APRIL 2011 • Technical Analysis of STOCKS
Formula : & COMMODITIES magazine
Formula : {parameter}
parameter:=5.0;
{parameter}
Please contact Karen Moore with approval
parameter:=2.5;
orBASIC
<insert changes:
CODE here>
<insert BASIC CODE here> LastValue(isSemicup*semicupperiod);
phone: (206) 938-0570 • fax: 206-938-1307 • email: KMoore@Traders.com

Visualizing the semi-cup tion algorithm and the function f for MetaStock. In the second
In order to visualize a semi-cup formation, you will probably sidebar, “MetaStock Exploration for Semi-Cup Formation,”
need a curve. A curve that gives nice visual results is the graph you can see the code forPROOF
a MetaStock#4exploration that can
of the function: be used to scan a basket of tradables and identify the ones
who have formed a semi-cup.
f(t) = Min(ePtop, a(t–B5)10 + 0.98ePbot)
where: “Maximize Your Profits”

using the Predictability of
ePtop – ePbot , JM Hurst’s Market Cycles
a=
(B0 – B5)10
e ≈ 2.71 and t ranges from B0 to B5.
option B
Coding the algorithm
• Hurst Trading Signals in real-time
• FX, Stocks, Commodities, etc
The algorithm can be coded in most technical analysis software • Based on “Hurst’s Cycles Course”
incorporating a programming language. In languages that of- • EOD and Intraday version
fer looping functions (such as Tradecision and AmiBroker), it • For private and professional traders
is feasible to see the historical performance of the algorithm

at a glance. Moreover, in software where you can define the
starting and ending points of an indicator (such as MetaStock
and AmiBroker), you can plot the graph of function f and get
a nice visualization of the semi-cup.
In “Semi-Cup Algorithm for MetaStock,” the first sidebar, Get Started NOW www.SentientTrader.com
you can see the code that implements the semi-cup identifica- For more information circle No. 28

IACI (weekly) 150 CHART PATTERNS
100
50 Examples
In Figures 3, 4, and 5 you can
see examples of the algorithm for
weekly charts. All three were found
18.990
using the MetaStock exploration
mentioned in weekly charts for
December 9, 2009. Figure 3 shows
a chart of Iac/InterActiveCorp
(Iaci) with a semi-cup curve
(parameter = 2). In Figure 4 the
Metastock
algorithm identified a semi-cup

formation in AT&T (parameter =
Figure 3: A semicup formation in iaci. The algorithm identified a semi-cup formation in a weekly chart of IACI on 1.5), and in Figure 5 it identified
December 9, 2009, using parameter=2.
a semi-cup formation in Tesoro
Corp. (parameter = 4). Finally, a
45 MetaStock exploration in daily
AT&T (weekly) charts for February 14, 1997,
43
41 revealed (among others) a semi-
39 cup formation for American Eagle
37 Outfitters (Figure 6) and a semi-
35 cup formation for Laboratory
33 Corp N (Figure 7).
31
29 Arithmetic vs.
27.5600 logarithmic
25 The type of chart you use (arith-
23
metic or logarithmic) plays an
important role in visual perception
21
when long-term charts are con-
19
cerned or when the price ranges
17
from very low to very high levels.
Figure 4: identification of a semi-cup in a weekly chart of AT&T. The semi-cup formation identified by the Most of the time, what seems to
algorithm in this weekly chart of AT&T is visualized using the “S&C - IsSemiCup-plot” indicator (red curve). The code for be a rounding bottom in arithmetic
this indicator can be seen in the sidebar “Semi-Cup Algorithm for MetaStock.” scale appears to be a V bottom in
logarithmic scale. However, when
a rounding bottom appears in loga-
100 rithmic scale, it always remains
Tesoro (weekly) thus in arithmetic scale. This is one
80
60 of the reasons why I chose to use
the natural logarithm of the price
40 in the algorithm.
30 As an example, in Figure 8 you
20 can see the same weekly chart
of Figure 5, but this time in an
12.340 arithmetic scale. The semi-cup
10 formation of Tesoro seems more
rounded in arithmetic scale rather
than in logarithmic. It is my belief,
however, that using arithmetic
scale in long-term charts can be
misleading, since low price plots
become a squiggle in the bottom
Figure 5: example of an “ugly” semi-cup. The emphasized formation in this weekly chart of Tesoro Corp., although of the chart. Logarithmic charts
are the way to go when you want
considered a semi-cup by the algorithm, is not so “pretty” as the formations seen in Figures 3 and 4 due to the sharp price
drop in late 2008. The chart uses a logarithmic scale and the type of scale (arithmetic or logarithmic) plays an important
role in pattern visualization. Note that if you hide the candlesticks of late 2008 with your thumb, a much more interesting to study classic technical analysis
image will be unveiled. formations in long-term charts.

CHARTING
Amer Eagle Outfit (daily) 2.5
2.0
1.5
THE
STOCK
1.0
0.5
MARKET
The Wyckoff Method
Figure 6: semi-cup example in a daily chart. A MetaStock exploration in the daily chart revealed a nice
semi-cup formation for American Eagle Outfitters (gray shaded rectangle) on February 14, 1997. The semi-cup then
transformed into a cup and Amer gave an approximately 2,000% profit in the next two years.
45
Laboratory Corp N (daily) 35
25
20
15
10
Edited by Jack K. Hutson

208 pages, 6x9 inches,
5
chart illustrations, indexed
$14.95 plus shipping & handling.
ISBN: 0-938773-06-2
Charting The Stock Market
describes and illustrates one of the
Figure 7: not all half-cups meet their other half. The algorithm found a nice semi-cup formation on best pioneering technical analysis
February 14, 1997, for Laboratory Corp N (gray shaded rectangle), but the formation failed to create a complete methods. This book takes the
cup. reader step by step through the
Wyckoff method: first, the basic
principles; second, examples of the
Tesoro (weekly) 70 method applied to the bond market;
Arithmetic chart 65 third, an outline of the steps to put
60 the method to use. Details of the
55 Wyckoff method covered in this
50 book include:
45 ◆ Point & figure charting
40 ◆ Trends
35
◆ Relative strength and weakness
30
◆ Stop orders
25
20 ◆ Forecasting
15 ◆ Wave charts & intraday
12.3400
10 ◆ Group stock behavior
5 ◆ Stock selection criteria
0 ◆ Price/volume chart reading &
-5
analysis
Figure 8: semi-cups in arithmetic charts. This is the same weekly chart of Tesoro Corp. shown in Figure
5, but this time in arithmetic scale. The semi-cup formation is now clearer. Using arithmetic scale in long-term charts ORDER TOLL-FREE: (800) 832-4642
can be misleading, since low price plots become a squiggle in the bottom of the chart. ONLINE: Traders.com
or (206) 938-0570—24 hours
In this article I will show you how you can easily

use the grid technique for spotting possible cup
formations during their development. 4757 California Ave. SW, Seattle, WA 98116 • 206 938-0570

PROOF #2
Parameters
Tradable 1.5 2 2.5 3 3.5 4 4.5 5
Safe and Secure since 1992 Abercrombie & Fit 66 0 0 0 0 0 0 0
Bright Trading, LLC Amer Eagle Outfit 0 45 52 0 0 0 0 0
Apple Inc. 47 0 0 0 0 0 0 0
Laboratory Corp N 0 147 212 0 0 0 0 0
Join hundreds of Bright Traders Worldwide!
Lamar Advertisa 82 0 0 0 0 0 0 0
• QUARTERLY TRAINING – register early! Urban Outfitters 83 126 0 0 0 0 0 0
• Free DON BRIGHT DINNER/WORKSHOPS Figure 9: results of a typical scan for semi-cups in a basket of us
stocks. Here is how the table of results from a typical scan for semi-cups looks like.
cHEcK OUT OUR WEBSITE fOR mORE INfO! The scan was performed for February 14, 1997, with MetaStock on daily charts of
US stocks using the code given in the sidebar “Semi-cup Exploration for MetaStock.
In this example, you can see that Laboratory Corp N has two semi-cups under way
Register early for our as of February 14, 1997. The duration of the first semi-cup is 147 bars (days) and
was identified using 2 as the parameter, while the duration of the second one is 212
NEW tRaiNiNg schEdulEs bars (days) and it was identified using 2.5 as the parameter.
Open a Branch Location or be an Individual Trader!

Check out our website, Or Feel free to call
Don Bright directly at 702.739.1393 How to use the algorithm
The algorithm I presented here should not be used as a
Trade from one of our nationwide locations...OR mechanical buy/sell system or anything similar. Its main
“Bright-at-home” Proprietary Remote. purpose is to eliminate the tedious task of manually scanning
 Use our Capital  Professional platform thousands of tradables to find those that have recently formed
 Advanced strategies  4 Day Trading Classes a semi-cup formation. The algorithm depends only upon the
 Low Costs  2-4 Week Boot Camps price behavior, however, and no additional parameters such
as fundamental or sentiment factors, trading volume, and
www.stocktrading.com overall market status are taken into account.
The recommended use of the algorithm is a static filtering
800.249.7488 tool to help you concentrate on equities that have severely
For more information circle No. 17 declined, then progressively slowed their deterioration and
show intentions of recovery (see Figure 9). It is your task
to study each semi-cup case using additional technical and
fundamental tools. Note also that a semi-cup formation may
stop being identified by the algorithm after a bar or two. In
this regard, the algorithm is not robust.
The prominent advantage of semi-cups

It is common to see failed cups especially in the context
of long-term bearish or nontrending markets. Since a cup
formation hails bullish times ahead, the term “failed cup”
refers to formations that did not initiate an uptrend (see Figure
10). As stated earlier, the semi-cup formation has a distinct
advantage over an integrated cup: The price is relatively low
and profit targets along with meaningful stop-loss levels can
be defined. Even if the semi-cup results in a failed cup, you
will at least gain the distance between the entry point and the
high of the semi-cup.
Nevertheless, I must reiterate it is best to use a mixture of
various analysis tools such as volume behavior, fundamen-
tals, sentiment, and overall market analysis before deciding
to trade semi-cups. This is because like a cup, which may
fail to produce a strong bullish trend, a semi-cup may fail to
produce a cup (see Figure 7 to get a sense of what can happen
when a semi-cup fails).
Customization and enhancement

The algorithm is undoubtedly primitive, but it is simple to
code in almost any technical analysis software and offers
a basic idea upon which you can work to make further en-
For more information circle No. 19 hancements. You can experiment altering and customizing

CHART PATTERNS
the Department of Finance and Insurance at the Technologi-

cal Institute of Crete. His academic website is http://www.
tem.uoc.gr/~siligard and he may be reached at siligard@
tem.uoc.gr.
Related reading
Kuhn, Gregory [1995]. “The Cup-With-
Handle Pattern,” Technical Analysis
of Stocks & Commodities, Volume
13: March.
Figure 10: possible implications of a semi-cup formation. A semi-cup Murphy, John J. [1986]. Technical
formation (red line) can either evolve into a cup or fail to do so. In the latter case it
is called “failed semi-cup” (black line). In the former case, the cup (with or without a Analysis Of The Futures Markets,
handle) either evolves into a strong bullish trend (blue line) or a “failed cup” (orange New York Institute of Finance.
line). In any case, if you decide to buy the tradable near the semi-cup lows (cyan O’Neil, William [1999]. 24 Essential
dot), you need to define clear technical targets and stop-loss levels. Lessons For Investment Success, McGraw-Hill.
_____[2002]. How To Make Money In Stocks, 3d ed.,
its internals or put additional conditions to concentrate only McGraw-Hill.
on the semi-cup formations of your preference. For example, Siligardos, Giorgos [2006]. “Identifying The Cup (With Or
you can add conditions about the trading volume between the Without The Handle),” Technical Analysis of Stocks &
early trending phase (from B0 to B2 in Figure 2) and the later Commodities, Volume 24: February.
round phase (from B2 to B5) of the formation. ‡MetaStock (Equis International)
You can also choose to be notified about a semi-cup
formation only when the latest closing price is close to the See the Subscriber Area at Traders.com for the code given in this
bottom of the formation to concentrate on cases where you article. See our Traders’ Tips section beginning on page 66 of this
could define a stop-loss order near your entry level. Finally, issue for additional code pertaining to this article. S&C
a serious enhancement would be to use
a recurring version of the algorithm
to increase its robustness. Recurring
formulas usually have a negative effect
on calculation speed, but many software
Magazines
programs offer external calculations via
dynamic linked library files that can Traders.com
help a great deal in terms of speed and Get the exact information
coding power. Articles you want online at the
Epilogue STOCKS & COMMODITIES
Often, the price of a stock falls, bottoms, Books
remains there for a while and eventually Online Store.
eases back up to where it was before the Software
fall, creating a cup-like formation. If the • PDF versions of past articles
overall market environment and/or the S&C Wear • Convenient credit-card transaction
fundamentals are supportive, the price
then surges to new highs; otherwise, the • File available for you to download as
price declines again. Hot Deals! soon as transaction is approved
The algorithm I presented here is • Prices start as low
suitable for both scenarios, since it Subscribe as $2.95
identifies the price at (or near) the bottom
• Full line of
of the cup. I believe it will be of great
interest and merit to all price-pattern Renew S&C products
followers. • Easy to start or
renew your
Giorgos Siligardos holds a doctorate in
TA09E2
subscriptions
mathematics and a market maker/trader
certificate from the Athens Derivatives
Exchange. He is a financial software
developer and scientific contributor in
http://store.traders.com

that technical analysis rests on
three basic precepts:
1 Market action discounts
everything.
2 Prices move in trends.
3 History repeats itself.
These core beliefs date back

at least into the 1800s and are a
part of Dow theory. Some would
argue that technical analysis can
trace its roots to 18th-century
Japan and the use of candlestick
charts on rice futures contracts.
There may be even earlier in-
stances of technical analysis,
but these three precepts lie at the
core of any study of charts.
It’s all in
the charts
Relying on candlestick patterns
meant that the trader believed
everything he needed to know
was in the price chart. This
meant that traders were con-
sidering the impact of weather
on the crop, the possibility of
disruptions in supply related
to war or epidemics, and any
other possible input to sup-
ply or demand. Economists
quantified this belief into the
efficient market hypothesis,
and the first precept of techni-
cal analysis — “Market action
discounts everything” — was
Nikki Morr
recognized as an idea worthy
of a Nobel prize.
From Art To Science Trends were a central theme
Technical Analysis Adapts

in the idea behind candlestick
charts and in the formulation of
And Thrives
Dow theory. Technical analysis
is grounded in the idea that
trends exist and trend reversals
dictate a need to change the
ongoing investment strategy.
Professions are built on a body of knowledge and an underlying rationale that explains the Many indicators are designed
reasons behind the knowledge. Technical analysis is a professional undertaking, but little to identify the direction and
has been written about its foundational principles. strength of a trend, and most re-
search on technical analysis are
by Michael J. Carr, CMT, and Amber Hestla dedicated to the second precept,
To
“Prices move in trends.”
begin thinking about the philosophy of technical analysis, first of all, we must con- No investment methodology
sider why traders believe it works. The major textbooks in the field acknowledge would work if the third precept,
+Carr Hestla.indd 1 2/24/11 2:23:58 PM

Traders’ notebook
“History repeats itself,” weren’t true. Long-term investors and irregular price movements that occur in smaller time dimen-
short-term traders attempt to find characteristics that worked sions. Prices can be thought of as a coastline on a map; they
in the past and assume they will work with some reliability in appear smooth on a globe, but that smoothness disappears as
the future. Candlestick traders noticed certain distinctive shapes the scale is refined.
that occurred over and over again. When point & figure charts Polish-born French mathematician Benoit Mandelbrot wrote
became popular, it did so because certain patterns proved to about this problem in a 1967 Science magazine article. It was
repeat themselves and these patterns offered clues to the future the first paper to introduce the concepts of fractal geometry.
direction of prices. The same was true about bar charts, as Of course, many technicians believe that markets are fractal,
repetitive patterns again proved to offer useful trading ideas. with Elliott wave proponents often claiming that fractals hold
These three concepts actually extend beyond technical the key to unlocking the mystery of future market movements.
analysis and are at the core of fundamental analysis as well. They usually define fractal to mean that market movements in
Markets discount what is known FEBRUARY 2010 • toTechnical
and allow investors Analysis
de- one time STOCKS
ofrelated
scale are & COMMODITIES
to moves magazine
in other time scales, usually
termine the fair value of a stock, or what it should be trading by a Fibonacci ratio. Technicians who make such statements
for. Sometimes the market will be wrong,
Please contactandKaren
the errors in probably
Moore haven’t or
with approval read much about fractal geometry.
changes:
the discounting process lead to investment opportunities.
When the error is recognized, the price will adjust to correct Richardson’s law
the mistake, and a new price phone:
trend will(206)
result.938-0570
This pattern•of
fax:Coastline
206-938-1307 • email:
measurements areKMoore@Traders.com
defined by Richardson’s law,
discounting and mispricing will occur over and over again, which states that the measured length was actually a function
and value investors who are patient will profit from it. of the measurement scale and defined by the relationship:
Analyzing charts objectively

PROOF
L(G) = MG#2
1−D
After defining underlying theories in a field of study, the next where:

step is often to apply math to prove these laws work. Sir Isaac L(G) = the length of the coast line
Newton defined his three theories of motion and then offered G = the measurement scale
mathematical proofs for them. In the same way, there are M and D = constants
studies supporting each of the precepts of technical analysis.
Economists have documented that markets discount the future;
researchers into value investing have shown that prices move
in trends; and the fact that these studies have been duplicated
around the world and over different time frames demonstrates
that in the markets, history repeats itself.
Technical analysts have often stayed away from mathemati-
cal proofs, with some claiming the tools of the trade such as
classical chart patterns cannot be adequately tested. In real- what we do...
ity, chart patterns can be tested and technical analysis can be We train traders to manage trading like
explained by math. In 2003, two business school professors
a business, believing this is the best
published a comprehensive proof of technical analysis in The
Journal of Technical Analysis. In that article, differential equa- way to achieve consistent returns.
tions based on a microeconomic model are used to describe
numerous patterns, including head & shoulders and certain who we are...
candlestick patterns such as dojis. We are Mentors, Options Educators
Another reason some technicians avoid math may be that
they have been handicapped by the general limits of the body
and Veteran Market Makers with more
of knowledge and not seen new developments in related dis- than 80 years of combined experience.
ciplines.
At times, the language of technicians mirrors Euclidian
geometry. Looking at charts, we see patterns such as rectangles
and triangles, and draw trendlines with a straightedge. In some
ways, these paradigms can be as limiting as the application Steve Steve Frank Ken
of Newtonian mechanics was to the study of the atom in the Lentz Papale Fahey Dole
late 19th century.
Euclidian geometry is generally characterized by two Register today!
dimensions and smooth surfaces. Price and time represent
two dimensions, but volume or open interest adds another
dimension to the problem. Line charts can display price
800-733-6610
www.discoveroptions.com
data as a smooth surface, but that representation ignores the

Traders’ notebook
Essentially, what this says is that we can measure things law of stocks could be useful in predicting crashes.
better when we use more precise instruments. Mandelbrot’s Over the years, technical analysts have developed a body
conclusion is that irregular natural objects can be modeled of knowledge for the discipline. When the brilliant minds
using fractional relationships. The degree of the relationship who developed indicators consider why they should work in
differs based on the coastline, and in the markets, perhaps the light of the precepts, unlimited possibilities open for technical
degree of the relationship differs based upon the underlying analysis. It can lead to increased profitability and increased
fundamentals of the market. respectability. As technicians, we always focus on the practi-
While it is true that prices are set by buyers and sellers, cal, and this endeavor would be no different. Writing papers
motivations vary among the markets, and applying the same in the language of science can lead to acceptance in academia
2011 • Technicalfractal
Analysis of StockS
relationship would& becakin to expecting Richardson’s
ommoditieS and industry, creating higher-paying job opportunities.
constants to be the same for each coastline (they are not).
ntact Karen Moore with approval or changes: Going forward
Power law One problem in trying to apply strict mathematical rules to
312 • fax: 206-938-1307
6-938-0570 ext. Richardson’s law is similar to the• power lawKMoore@Traders.com
email: in that the latter the markets is that in some ways, markets offer an example
mathematical principle exists when the relationship between of the Heisenberg uncertainty principle. In quantum mechan-
the two variables can be explained by raising one to a power, ics, this principle notes that you can’t always measure two
as noted by the power stated (1-D) in Richardson’s law. Many things precisely. Measuring the speed of an electron alters
proof #1
things have been found to correspond to a power law, includ- its position, and you can’t define both with the same degree
ing the size of cities, the frequency of words in an article, and of precision at the same time. On a smaller scale, you can’t
even the structure of heartbeats in humans. measure market sentiment without having an impact on that
Incomes and other economic data follow a distribution sentiment once the results are released.
defined by a power law, which usually means that small val- This problem did not hold back the theoreticians of the
ues are common, and large values are relatively rare. Market early 20th century who were attempting to unlock the myster-
crashes, which are fairly rare events, follow this rule. Serious ies of the atom. Recognizing the nature of the problem and
research designed to identify the proper variables in the power discussing the theoretical underpinnings of price movement
may allow technical analysis to advance in the 21st century.
Michael Carr is a mutual fund subadvisor. He is a member of

the Market Technicians Association, editor of the Mta newslet-
ter Technically Speaking, and author of Smarter Investing In
Any Economy (W&A Publishing) and coauthor of Conquer-
ing The Divide: How To Use Economic Indicators To Catch
+
Stock Market Trends (W&A Publishing). He may be reached
® at marketstrategist@gmail.com.
Amber Hestla is an independent research analyst. Her work
has been featured in the Mta newsletter. She may be reached
at HestlaResearch@gmail.com.
Suggested reading
Caginalp, Gunduz, and Donald Balenovich [2003]. “A Theo-
Thank you for voting retical Foundation For Technical Analysis,” Journal of
NeuroShell Trader #1 Technical Analysis, Winter–Spring.
Mandelbrot, Benoit [1967]. “How Long Is The Coast Of
Artificial Intelligence Software Britain? Statistical Self-Similarity And Fractal Dimension,”
9 yeArS In A row! Science, May 5.
Just announced
New 6.0 & Power User versions
www.neuroShell.com
301.662.7950
S&C

Q&A
SINCE YOU ASKED
Confused about some aspect of trading? Professional trader Don Bright of Bright
Trading (www.stocktrading.com), an equity trading corporation, answers a few of
your questions. To submit a question, post your question to our website at http://
Message-Boards.Traders.com. Answers will be posted there, and selected questions
will appear in a future issue of S&C.
Don Bright of Bright Trading

Late on the trends pair, does it matter which side you get
I have a bad habit of getting into trends into at the beginning, buy or short?
too late. I try to keep an eye on stocks First of all, we recommend you enter the pair. But when you’re exiting at the
with strong correlation to the Standard the hard side first. The definition of “hard “pairs price profit target” (vs. individual
& Poor’s 500 with no outstanding news side” varies. It used to be we would wait stock price), I suggest you close both
on them about earnings and so on. The for the uptick to enter the short sale first. sides with a profit. As mentioned, you
indicators I mainly use are the S&P 500 That was the hard side for years. Now may have a few layers on, taking profits,
and the futures tick chart. I also refer to that the uptick rule has been eliminated, adding pairs back, taking profits, over
the duck list frequently and look for at we look at other factors. Check the bid/ and over. This is what we call “produc-
least five of the seven ducks to line up in ask spread first. If it’s a wide spread, then tion” — and so much of your profits
addition to the other indicators. that would affect your getting into the are made this way versus waiting for a
I also try to watch for resistance, but I other side. In that case, enter the wide longer-term profit target.
still seem to take a position right before spread order first. When that’s filled, And last question: What is the Vix? I
the stock changes direction. What am I then you have little risk entering the know it’s the volatility index, but what
doing wrong? —Jordan side with the narrower bid/ask spread, does it mean when it moves? How would
I gather you’ve already been to our and thus lower risk. I use it as an indicator? How is the Vix
classes, so let me explain to the readers Second, when you are in a pair and calculated? Does it measure volatility
what a “duck list” is. Basically, a duck list the spread goes in your favor and goes of the market as a whole or do different
is getting several indicators in the same to your exit points, does that mean you sectors have different volatility indexes?
place at the same time — for example, close out positions on both stocks? Or is it weighted to a certain part of the
premium or discount to (futures) fair Consider your first entry with two lay- market? Thanks, Don. —Emanuel
value intraday, strong stock in a strong ers (each layer can be 100 x 100 shares, The Cboe Volatility Index is a measure
group and so on (for immediate direc- or 500 x 500 shares, whatever your risk of market expectations of near-term
tional plays). In addition, be sure the tolerance dictates). The reason for this is volatility conveyed by S&P 500 stock
engine of the day is in alignment with that when a pair goes against us, we will index option prices. Since its introduc-
your chosen directional entry. add more layers (three to five, depending tion in 1993, Vix has been considered to
That said, your question shows one on various factors), which leads to more be the world’s top barometer of investor
major flaw that happens to many trad- layers when things are going against us. If sentiment and market volatility.
ers, and that is waiting for too much we only have one layer on and then take So this index moves up and down,
confirmation before entering the trade. it off for a profit, the price continues to from a “standard” number of 12 to 15,
We say to only expect five of seven ducks go in our favor, we have no position and and up as high as around 80 back in
at any time due to the fact that this is a no more profits. So by keeping at least 2008. Volatility is defined as how much
constantly changing market. one layer on, we can take advantage of a stock (or index) is likely to move in
I would also advise you to use the trending pair prices. a 12-month period. A $30 stock, with a
pivot points from the futures contracts — Third, if one stock of the pair stays flat 30 volatility, for example, is expected to
eminis, for example. You can find these and one moves in your favor to your exit move up or down $9 during the next 12
at www.stocktrading.com/Tradinginfo. point, would you take profit on that and months. So when the Vix is lower, more
htm. You can certainly use the individual leave the flat position open, and then try traders/investors are buying stock and
stock’s support/resistance points as well, to retrace on the one you exited with profit selling calls (covered writes) compared
but be sure to use the futures first (espe- on it? Or does exiting a position in a pair with speculating by buying calls and/or
cially for daytrading). For longer-term trade mean you should close out both puts (thus running their prices up, caus-
trading, you should look at the price sides so you enter and exit together? ing a higher Vix). Basically, expect more
action for the individual stock. You can enter with what we call a movement in the market with a higher
“crutch” pair trade. You can buy the Vix. Traders will be selling volatility
PAIRS AND VIX long side when the market is heading up, (options and so forth) and hedging with
I’ve got a few questions, if you don’t and either close that same side or “lean stocks and exchange traded funds. Hope
mind. First, when you’re getting into a on” (crutch) the other side, completing this helps. S&C
+1104 Bright Stocks QA.indd 1 2/24/11 9:55:48 AM

INTERVIEW
Back In The Day With CompuTrac
Then And Now

With Tim Slater
Before there was TradeStation, before there was MetaStock and eSignal, there was
CompuTrac, one of the first technical analysis software programs ever written for
a personal computer. The software could process technical analysis on stocks,
futures, and fixed-income products. Tim Slater, the founder of CompuTrac Inc.,
wanted to chart his stocks, but discovered he didn’t have the patience. He found
someone who did — and even he was surprised at what happened after that. In
1979 CompuTrac the company built the first set of software to do technical analysis
online, real-time, presaging the coming era of the individual trader.
In addition, Slater founded a series of conferences that were among the earliest
to focus on trading and technical analysis and ground-breaking in its time, eventu-
ally holding them around the world, teaching traders the use of the CompuTrac
software. Eventually, the company and its software were sold to Telerate, ushering
in the era of computer technical analysis.
STOCKS & COMMODITIES Editor Jayanthi Gopalakrishnan and Staff Writer Bruce
R. Faber spoke with Tim Slater, now retired and living in New Orleans, on January
24, 2011, via telephone.
What surprised
T im, how did you get interested The TI-59 wasn’t sophisticated enough me the most is the
in technical analysis? for what you had in mind. So what did number of individual
It had to have been back you do? traders who decided
when I was in graduate school. I had A friend called me out of the blue and
inherited a portfolio of securities, and I said, “Tim, we are going to buy you a
to leave their jobs to
started tracking them. Because I am visu- computer.” I said, “What for?” He said, trade on their own.
ally inclined, I began graphing them also. I “My wife won’t let me have one, and I
started doing some technical analysis then, know you’ll let me play with yours.” So I
and began using the computer at school at bought an Apple II. My rationale was that What did you do?
night to grind up some figures. Along the I was going to use it to keep my charts. I went to Loyola and asked the pro-
way, I found out a Merrill Lynch analyst fessor, whose name was Jim Schmit,
was working on technical analysis on the Is that what happened? if he would do some programming for
company’s mainframe at night when he I tried to do some programming, but me, and he said yes. We hired a couple
could get to the computer. I was intrigued I didn’t enjoy it. I didn’t have a knack of extra programmers, very, very good
by that. That was my first impression of for it. So I went back to the computer programmers, all students at Loyola, and
what computers could do. store, and I was asking the owner some put them in the playroom of my house.
questions, one of which was, “Is there They worked part-time at about $10 per
That would have been when computers any way to map the cursor to know hour or something. Within a two-year
were bigger than the size of a Starbucks what the value of a point beneath that period we had 56 employees, 27 of whom
coffee shop these days. cursor was?” He told me no, that the were programmers.
About this time there was a program- Apple didn’t have enough horsepower By that time, I had formed a partner-
mable calculator called a TI-59, which to do that. ship with Jim and we called the company
had a little tiny card that you could put There was a kid standing behind me CompuTrac. I had the majority of the
your formulas in. I was intrigued so I from Loyola University who overheard stock and he had a lesser amount, and we
bought one, and I spent about a year us, and he told me that he had a professor apportioned off some of the rest early on
working with it, and it wasn’t long before who had developed something he called to a few people early on whom I had met
I was keeping about 100 charts to track a “Super Chip” that he used for character at conferences. They were technicians
my stocks. It would take three hours a generation, and it probably had enough Jim Sibbet, Manning Stoller, and Walter
night to post all of them. It was sort of power to do what I wanted. Bressert; and Rick Redmond, who was
hard to keep up. a broker in Jackson, MS. They decided
50 • April 2011 • Technical Analysis of STOCKS & COMMODITIES
+1104 Interview_new.indd 1 2/23/11 5:24:34 PM

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to share the cost with us. It turned out company. I talked first to Reuters, who would send everybody an email notice
it was going to be considerable, so we came down with all their engineers and that a patch was available. That sounds
made the group a little bigger, ending tried to figure out what we were doing. humdrum now, but it was ahead of its
up with 30 members. Eventually, we Jim Schmidt was smart enough to throw time then.
offered it to the public so we didn’t have them a bunch of curves. Because they We did a lot of innovative things. I
to keep putting up money. That’s when thought they knew everything we were owe a lot to Jim Schmit and our pro-
we really took off. doing at that point, they dropped out. grammers for the programming side of
it. Jim was not interested in technical
What happened then? What did you end up doing? analysis. So I would push him to do the
So we got a huge loft that housed the I ended up selling the company to studies I wanted. I handled the sales.
programmers and the office staff. We Telerate. Telerate, of course, had offices On the simple Apple, we programmed a
realized that the Apple computers were all over the world at the time. We turned miniature version of a brokerage firm’s
insufficient for what I wanted to do, out two or three thousand of our comput- back office. We kept all the accounts.
which was to read a line tick by tick. We ers, and used those as the base platform. We kept multiple portfolios. We would
developed our own computer, and here Then when Ibm came out with their first balance them and give them summaries
again, Jim Schmit was the right man at model, Telerate decided for many reasons and do bookkeeping.
the right place. to switch to the Ibm system. So we had We also built testing into the original
to recode and recompile everything for system. That was built in very early,
Why is that? Ibm. where a person could build a system
Several years before that, he had given About this time I started holding con- and test it over a database of any length
one of his graduate students a project to ferences. From almost the beginning we they wanted to. When we were dealing
design a compact computer language. were holding domestic conferences for with these smaller computers, they had
Remember, in those days we didn’t our members. We had always been sort to do it in sections; they couldn’t do a
have much memory. We also didn’t have of a cooperative, emphasizing strong 10-year period. They had to break it up
much space for an operating system. He feedback on the part of the membership. into three-year blocks, and then carry
came up with a language that had less We never separated the programmers forward the results. That was quite an
than 14K of code operating system. It from the sales staff. They were always innovation too, but we were able to pull
was very small. As powerful, probably, close together so that when a customer it off. They didn’t move as fast as newer
as the Apple OS is on the iPhone these called in and complained about some- computers do now, but they essentially
days. However, it was fast. thing, the salesman could turn around did everything. And we had some very
Another graduate student was given a to somebody else who was a few steps smart programmers.
task that was equally interesting: Here’s away and say, “So-and-so programmed
a language — the one that the other stu- this. Let me let you talk to him.” We got Even after all these years, we still get
dent was designing — but we don’t have things done quickly. calls from time to time asking what
the chips yet to execute it. How would happened to Telerate.
the computer work? He spent two years Even now! Telerate for various reasons
designing the computer. lost a lot of space to Bloomberg, mainly
At that point we decided to build because Telerate charged for everything.
our own computer and marry those two You were charged for every little add-
concepts by the time the chip was ready. I on. The billing from Telerate got so
bought the first four chips for about $1,500 complicated that the big customers, the
per chip. We put the computer together large brokerage firms, the worldwide
and within weeks it was working. It was firms could not even understand their

APRIL 2011 • Technical Analysis of STOCKS & COMMODITIES magazine
bills and got frustrated. Bloomberg,

Please contacton reliability,
Karen Mooremuch withmore tick-by-tick
approval or online
changes:a day’s filing or something. You could
the other hand, just went in and charged work that is fabulous. In some cases it is recover it, but you had to go to a differ-
per station. If they did not have it now easier to handle and easier to control. ent section of their system, look in their
phone:
and added it later, you got it (206)
for free.938-0570
When • fax: 206-938-1307
we started • email:
we used a database in KMoore@Traders.com
history, and hope to find it. It was very
Telerate got eaten alive. So Dow Jones, Florida and we had to log in there every slow. The modems at that point were
which owned Telerate, turned around and night to get our prices. You had to have only 300 baud. You could read it as it
sold it to Bridge News. Then Bridge went a library of what prices you wanted and was scrolling across the screen. That
PROOF #1
under and Reuters picked up the pieces. you had to download a history of that was how slow it was.
Many of our programmers ended up particular item. It was tough. You could
working for Reuters. It was an unusual miss some datapoints or you could miss Did you recognize the need for such
group. They all had some connection to
New Orleans in one way or the other. We LEGAL NOTICE
LEGAL NOTICE
never lost any of our programmers. So we
were very fortunate. I don’t know what I NOTICE OF CLASS ACTION SETTLEMENT
would do in today’s environment where
kids work at a place for a year and then
move on. It would drive me up the wall.
If You Purchased a June 2005 Ten Year Treasury Note
Anyway, the software was finally inte- Futures Contract (“June Contract”)
grated and if you look at Reuters software
today, it is pretty much how it started Between May 9, 2005 and June 30, 2005, Inclusive,
with CompuTrac. All of the original 60 In Order to Liquidate A Short Position In the June Contract,
studies I was most interested in are still
being used today at Reuters. I don’t know Then Your Rights May Be Affected
of any of them being dropped because and You May Be Entitled To A Benefit
they were ineffective. Everybody used
them a little differently. Many books The purpose of this notice is to inform you of a Settlement with defendants
were written using the system. When Pacific Investment Management Company, LLC and PIMCO Funds
John Murphy wrote his first book about (“Defendants”) in the certified class action Hershey, et al., v. Pacific
technical analysis, all of the charts came Investment Management Company, LLC, et al., Docket No. 05-cv-04681
out of CompuTrac. (RAG) (“Action”) pending in the U.S. District Court for the Northern
District of Illinois. The Court has scheduled a public Final Approval
It inspired a lot of people. Did you ever Hearing on April 7, 2011, 2:00 p.m. at the Everett McKinley Dirksen
expect that technical analysis and the United States Courthouse, 219 South Dearborn Street, Chicago, Illinois,
software associated with it would come Courtroom 1219.
to where it is today? In order to resolve the claims against them, Defendants have agreed to
No, I didn’t. But what I see now seems wire transfer $59,375,000 into the Escrow Account within ten days of the
to be pretty much the same old studies. Court’s Order requiring that notice be sent to the Class and an additional
Everybody wants to tweak their formu- $59,375,000 into the Escrow account at least seven days before the Final
las, and do a little of this and a little of Approval Hearing. Together, the foregoing payments, plus all interest
that. When you get 60 of them, though, earned thereon, constitute the Settlement Fund.
you have such a combination that you
can just keep plugging them together in A copy of the Settlement Agreement, the formal Settlement Notice, Proof
different ways. I don’t think that basically of Claim and other important documents are available on the settlement
website at www.pimcocommoditieslitigation.com. For additional
the techniques have changed any.
information, you may also contact the Settlement Administrator (Rust
Consulting, Inc.) at 1 866-216-0282.
So the only thing that’s changed is
how they’re put together? Is that for If you are a member of the Class, you may seek to participate in the
everything? Settlement by filing a Proof of Claim on or before June 7, 2011. You may
Well, when you get into the esoteric obtain a Proof of Claim on the settlement website referenced above. If
like Elliott waves and cycle work, people you are a member of the Class but do not file a Proof of Claim, you will
do tend to come up with something new. still be bound by the releases set forth in the Settlement Agreement if the
To me that is an arcane science and I have Court enters an order approving the Settlement Agreement. All objections
never been too interested in Elliott waves. must be made in accordance with the instructions set forth in the formal
But overall, I don’t think that technical Settlement Notice and filed with the Court and served on the Parties’
analysis has changed all that much. The counsel by March 15, 2011.
speed has changed. There is much more

INTERVIEW
a product? like Wilder and Larry Williams. Larry Mark, Stan Ehrlich, Joe DiNapoli, and
No, but as I went along it just sort of called me and threatened to sue for my Mark Douglas were just a few. These
all fell into place. The only thing that use of his formula. I think it was about people have probably all written articles
I could add was that luck had a lot to the Williams’ %R. I told him that he for you.
do with it. Had that student not been published it, but he couldn’t copyright a
there that day at the computer store, I formula, but in my literature I was going Some of them certainly have.
would never have ended up meeting Jim to give him full credit. All I wanted to do, What it boils down to is that no mat-
Schmit and would have probably given I told him, was give people the tools they ter what tools you have, if you can’t get
up programming and gone back to doing needed that were already programmed. control of your emotions you are going
it by paper. Fortunately, he was the right Soon the originators realized I was being to blow yourself out of the water. Mark
person at the right place. straight with them. I was educating the Douglas may not be a technical analyst
public, and that their name had attribu- but he is dead-on correct that the psy-
It certainly inspired people to create tion with everything I did. chology of a trader is as important as
their own trading systems. Was that More often than not, they also became the tracing system. He turned out to be
your objective? speakers at our conferences. Over the a very good presenter. Technician and
Yes, I purposely inspired users to cre- years I used something like 183 speakers. researcher Nelson Freeburg is another
ate their own trading systems. I didn’t During the domestic conferences I would person who spoke at our conferences. He
dictate anything. I gave them a whole have as many as 30 or 35 speakers. We is a good researcher. There were many,
bunch of tools that had been in common would have five rooms with speakers many others who were also good.
use or that were well constructed. Think- going at any given time. There were Your publisher, Jack Hutson, pre-
ing back to J. Welles Wilder’s work, he some I would invite year after year. sented at a conference in Toronto. He
had a bunch of very good, well-thought- John Murphy was one. Walter Bressert was an early member of CompuTrac. He
out, programs. was another. Dick Arms, Gerald Appel, called me on a Saturday, and we spent
At the beginning, I ran afoul of a lot of Andrew Cardwell, Marc Chaikin, Dick two or three hours talking. He wanted
people who had published their works, Diamond, Barbara Diamond, Tom De- me to publish a newsletter on a regular
basis that would discuss what the studies
were, how to use them, their background,
and so on. At that point we were growing
very fast and I didn’t have the capacity to
take on an additional task so I told him if
he would do it I would give him our mail
list and I would do everything I could to
help him. He decided to do it and that’s
how your magazine got started.
Do you still speak at seminars and

conferences around the world?
Sneak preview … No, I don’t.
What surprised you the most about how

the popularity of technical analysis
Volume Zone Oscillator Context Is Everything grew?
by David Steckler and Waleed Khalil by Gil Morales and Chris Kacher I never thought there were going to
This indicator can be applied to trending Use stock and index charts to deter- be as many daytraders as we have today.
and nontrending markets. It can be used mine market context. When we were starting out in the busi-
to trade the Dia, Spy, and gold. ness, there was a very small subset of
Gap Fill And Go technical analysts. We made the jump to
Investment Candles by Jamie Theiss go international because we wanted to
by Thomas Bulkowski Take a look at two trades using a strat-
Which candlesticks work best as reversal egy you can use almost every day.
or continuation patterns?
…Coming soon!

reach a huge number of people quickly. ity. I have always been interested in set intelligent stops for the time frames
Computer graphics were being taught commodities. They are compromised I am trading. I really prefer not to. I
in the schools and it was not going to now by the trading of large banks and don’t have to. I am now a dispassionate
be a secret any more. People were do- institutions. I could not trade today’s observer.
ing charts and this type of thing, but as markets. I would be very uncomfortable I am amazed at the number of studies
far as applying charts to the markets in the time frame I was trading before, that still get published. I don’t see any-
was concerned, we were way ahead of which was something like five days to thing that is tremendously new. I see a
everybody else. I didOCTOBER 2010 •twoTechnical
not want to lose weeks. There is too much
Analysis noise in &
of STOCKS lotCOMMODITIES
of things that have been rehashed one
magazine
that position. I knew that Telerate and the markets now. way or another. You only have so many
Reuters were going to copy us, but we datapoints. There is only so much you
threw them so manyPlease contact
curves that Karen
the first What Moore with
kind of approval
changes orforesee
do you changes:can do with the open, high, low, close,
product they came out with was just full in the future for retail traders? volume, and open interest. You can put
of bugs. It took themphone:
a while(206) 938-0570 • fax: 206-938-1307 • email: KMoore@Traders.com
to recover I think the market is going to lose a more computer power on it. Actually,
from that. lot of retail traders unless significant unlimited computer power doesn’t seem
I think what surprised me the most changes are made. More and more private to make that much of a difference techni-
is the number of individual traders who traders will become disenfranchised, and cally, except you can execute your trades
decided to leave their jobs and begin they will lose interest and feel that PROOF #1
they faster.
trading on their own. I could foresee the can’t compete.
institutional market, but I didn’t see the Thank you for speaking with us, Tim.
individual traders coming on at all. Do you think the high-frequency trad-
Tim Slater can be reached at
ing or algorithmic trading taking place
tcslaternola@me.com.
What are some of the differences you today affects the retail traders?
see in the markets today versus that of I don’t know if they throw off that
the 1980s? many signals. But the volatility is
The main difference I see is volatil- frightening. It would be hard for me to S&C
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+1104 Interview_new.indd 55 3/2/11 9:09:03 AM

product review
WSJ iPad App

The Wall Street Journal
for the iPad
http://online.wsj.com/public/page/ipad.
html
Requirements: iPad and a wireless
Internet connection
Price: Free (limited access to content) or
$3.99 a week (for complete access)
by Wallace Wang
F
or many Wall Streeters, reading
The Wall Street Journal has
always been important for keep-
ing track of the latest financial news. In
an age where real-time stock quotes are
available over the Internet and financial
news stories change every few minutes,
however, the idea of relying on a physical
newspaper feels more and more anti-
quated every day. Fortunately, you can Figure 1: it’s all there. You can access the current day as well as a week’s worth of The Wall Street Journal.
avoid the drawbacks of carrying around
a physical newspaper and still enjoy the
editorial content of the Journal through to the print version of the Journal can Journal costs $6.99 a week, while the
the company’s free iPad app. get full access to the iPad version for a online version costs $2.99 a week.)
The Wall Street Journal iPad app is limited time. If you want complete access Besides allowing you access to all
free but limits access to roughly half of to the iPad version, you’ll have to pay content, paying for the iPad version also
all available stories. Paid subscribers $3.99 a week. (The print version of the lets you view the last seven days. So
you can not only read the full content of
today’s edition, but all the content of the
past week’s editions as well (Figure 1).
Reading the stories

If you’re already familiar with the print
version of the Journal, you’ll find the
iPad form mimics it, making adjusting
to the iPad simple.
Instead of turning physical pages, the
iPad version has you swipe your finger
toward the left or the right to read the
previous or next page. To jump to a dif-
ferent section of the newspaper, you use
a variety of swiping, tapping, or pinching
motions (Figure 2).
These finger gestures might seem
strange initially but after a few minutes,
they’ll feel like second nature. For those
who prefer a more traditional menu struc-
ture, the iPad app offers pop-up menus
that you can choose at the bottom of the
Figure 2: swipe, tap or pinch. Navigating through the newspaper requires different finger gestures. screen (Figure 3).
++PR Wang_New.indd 1 2/23/11 5:28:25 PM

CHARTING
is that they display text in a fixed font
size. For many older readers, that means
THE
STOCK
t
fumbling for reading glasses before they
can start reading. With the iPad version,
MARKET
the text can easily be enlarged or shrunk.
This ability means you can comfortably
read the Journal at any time.
While many people simply read the
The Wyckoff Method
version of the Journal they can buy at their
local newsstand, you might not realize
Figure 3: a more traditional structure. slightly different editions are published for
Menus can help you navigate between different sections the US, European, and Asian markets.
of the newspaper.
You could buy all three editions and
lug them around, or you could read all
three editions on your iPad without hav-
ing to carry anything extra. Just tap a
menu to choose which edition to read and
you’ll have access to slightly different
content targeted for a different market.
What makes the iPad version especially
useful is that it is never out of date. Buy
the print version of the Journal and all
the stories you see are already hours, if
Edited by Jack K. Hutson
not days old. Read the iPad version and 208 pages, 6x9 inches,
Figure 4: VIDEO CLIPS. Video clips focus on a specific
news story. These video clips act like watching a portion
as long as you have Internet access, you chart illustrations, indexed
of a regular newscast focused on just the information can read the latest stories as they appear, $14.95 plus shipping & handling.
ISBN: 0-938773-06-2
you want to know about. reducing the chance that you’ll be stuck
reading old news. Charting The Stock Market
describes and illustrates one of the
best pioneering technical analysis
Saving stories methods. This book takes the
If you found an interesting story in an reader step by step through the
ordinary print newspaper and wanted to Wyckoff method: first, the basic
keep it, you’d have to either photocopy principles; second, examples of the
it or clip it out of the paper, leaving a method applied to the bond market;
third, an outline of the steps to put
gaping hole that might slice another story the method to use. Details of the
in half on the other side. Wyckoff method covered in this
Fortunately, saving an interesting book include:
article on the iPad version does not ◆ Point & figure charting
Figure 5. CLIPPINGS. You can save a story within
mean you have to physically mangle ◆ Trends
the iPad app or by emailing a copy. the newspaper, rendering it impossible ◆ Relative strength and weakness
for use other than recycling. Just bring ◆ Stop orders
up a menu and you’ll have the choice ◆ Forecasting
Whereas the print version can only of saving the story or emailing a copy ◆ Wave charts & intraday
display static images to accompany an (Figure 5). Saved stories are accessible ◆ Group stock behavior
article, the iPad version can display either from the home screen of the Journal app, ◆ Stock selection criteria
fixed images or video clips. These clips allowing you to read them later at your ◆ Price/volume chart reading &
act like a portion of a regular newscast convenience (Figure 6). analysis
focused on just the information you want Since many people enjoy sharing ORDER TOLL-FREE: (800) 832-4642
to know about (Figure 4). articles they read, you can email a link ONLINE: Traders.com
Like any video clip, you can pause, to a particular story to a friend or to your or (206) 938-0570—24 hours
rewind, or fast forward while also seeing own computer so you can print out a copy
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you can expand the video so it fills the
entire iPad screen or watch it embedded Retrieving stock quotes
within the app. For years, one primary purpose of The 4757 California Ave. SW, Seattle, WA 98116 • 206 938-0570
One problem with print newspapers Wall Street Journal has been its extensive

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product review
US, European, or Asian edi-

tions, the iPad edition clearly
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Just click on the
a digital tablet.
Since the Journal app Traders.com Advantage
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Figure 6. READ THEM LATER. You may not have the time to read a you may prefer the greater
story when you see it. You can save it to read at a later time. access to stories and the
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Real-world technical
Figure 7. retrieving stock quotes. You can view real-time stock
quotes as long as your iPad has Internet access.
When he’s not trading analysis— for all the
stocks or studying chart
patterns, Wallace Wang
timely trading tips
list of stock quotes. Since such lists are writes computer books including Mi- you could want!
now obsolete through quotes readily crosoft Office For Dummies, Beginning
available over the Internet, the Journal Programming For Dummies, My New
app lets you search for specific stock Mac, and My New iPad. In addition, DAILY UPDATES ON:
quotes that may be of interest to you. he develops Windows, Macintosh, and • Charts
As long as you have an Internet con- iPhone/iPad applications.
nection (either through WiFi or a 3G
• Indicators
cellular phone connection), you’ll be Suggested reading • Currencies
able to access real-time stock quote data Wang, Wallace [2011]. “Nasdaq Omx • Stocks
that you can store as watchlists within Portfolio Manager For The iPad,”
the iPad app (Figure 7). product review, Technical Analysis • Commodities
of Stocks & Commodities, Volume • And How-To Advice
It’s always with you 29: March.
The Journal’s iPad app gives you the best _____ [2011]. “Bloomberg For The One-year subscription is $64.99*
of the print version with the advantages of iPad,” product review, Technical To order call toll-free:
the digital. Its abilities to adjust the size of Analysis of Stocks & Commodities, 1-800-832-4642
its text for easier reading and watch video Volume 29: January.
or online:
clips turns the iPad version into a “living” _____ [2009]. “Trading On A Mac,”
newspaper that’s no longer bound by the product review, Technical Analysis www.TRADERS.com
Circ@Traders.com
static limitations of newsprint. of Stocks & Commodities, Volume Ph: 206-938-0570 • Fax: 206-938-1307
With real-time stock quote data, unlim- 27: April. *Washington state residents add
ited newspaper clipping storage, and the ‡Wsj iPad app sales tax based on your locale.
S&C TA10A3
ability to store and access a week’s worth of

Explore Your Options
Got a question about options?
Tom Gentile is the chief options strategist at Optionetics (www.optionetics.com),
an education and publishing firm dedicated to teaching investors how to minimize
their risk while maximizing profits using options. To submit a question, post it to
our website at http://Message-Boards.Traders.com. Answers will be posted there,
and selected questions will appear in a future issue of S&C.
Tom Gentile of Optionetics
Does 1 + 1 = 2 or 1? For instance, a trader long an Ibm position. On the other hand, if I send a
Can I adjust a profitable long butterfly February 155/160/165 butterfly one time market order, I’m amazed at how often
prior to expiration and if so, how? Would (1 x ‑2 x 1) might decide later on to buy the average fill price is worse than the
it amount to being a smart approach for one February 160/165/170 butterfly. quoted market. Is there anything I can
this type of spread? The net position leaves the trader with do to help with this unwanted trend with
Good question. When dealing with a February 155/160/165/170 call condor my option positions?
open profits, it’s always important to (1 x ‑1 x ‑1 x 1). Part of your dilemma sounds like your
consider fresh alternative positioning Who would do this? A trader who still trading involvement has been in lesser- or
through the adjustment process. As far holds a range-bound technical opinion lighter-traded issues. One recommenda-
as executing goes, the simplest and a on shares but wishes to give the stock tion right off the bat would be to stick
perfectly reasonable adjustment would additional room either up or down (in this with more active and liquidly traded
be to lock in your profits by exiting the case, up) and is someone who might con- options. Believe it or not, they aren’t
long butterfly in full or partially. sider this type of adjustment worthwhile. always the same and not having both
A return on investment of 50% to 100% While the new position’s maximum risk conditions in place can be problematic
prior to expiration isn’t uncommon for a is increased and the maximum profit is when placing orders.
long butterfly. That’s impressive in some reduced, the probability of a profit is In general, sticking with stocks whose
ways, but the same profits will be a good increased, as they will have expanded front two-month contracts trade at least
deal less than the idealized maximum. the breakeven zone. several hundred calls and puts daily and
That can be annoying. But remember the Another possible adjustment would whose individual quoted markets show
old saying: “Don’t get mad, get even.” be to consider taking off one of the bid/ask spreads of no more than $0.05
Coupled with an appreciation for another verticals embedded in the butterfly if the to $0.15 wide for options under $3.00 is
old saying, “You get what you pay for,” technical opinion warrants such action. something to consider when trying to get
traders can redirect their focus and take For instance, in our Ibm illustration, if a fair fill in the market.
profits along the way rather than hold the trader had become bearish on shares, Another idea would be to look at
on for no good reason. selling the February 155/160 bull call conditional orders, which can be tied
This makes a good deal of sense as spread would leave the trader with one to either the stock or option price or
opposed to simply holding onto a paper February 160/165 bear call spread. both. What a conditional order does is
profit. Not only are butterflies generally This position, like the original but- hide your bid or offered contract from
slow to expand toward their maximum terfly, will also show its maximum loss the market maker who might otherwise
profit potential due to the razor-like (butterfly debit + bear vertical spread attempt to use your order flow to their
precision required of shares, it’s also an width – credit received “to close” bull advantage. From what I can tell about
unlikely outcome. Worse, those paper vertical) at expiration if shares con- your attempts at using limit orders,
gains could be quick to come undone tinue to rally above the long 165 strike. you seem to have a firsthand working
altogether. And while we may have However, the bear vertical will lock in knowledge of that concept.
“only” paid $0.40 or $0.50 to initiate its maximum profit potential if shares That said, conditional orders are main-
the butterfly, lots of small losses can hurt are below 160. tained by your broker’s internal trading
you over the long run. platform until certain conditions are
An alternative adjustment could be to Danged If I Do, Danged If I Don’t met, such as the option’s offer dropping
add another butterfly. In this case, though, I’ve had a consistent challenge involving to your hidden bid price. At that time,
one butterfly plus another doesn’t neces- the opening of option orders and getting your order is instantaneously put into
sarily add up to two butterflies. When a fills that I see as acceptable. With limit the marketplace to receive a fill at the
trader adds a second long fly, it’s typically orders, I feel as though my order never offered price.
designed to create an all-call or all-put gets executed until an unwanted move Contributing analysis by senior Optionetics
long condor by adding a wing to the old in the underlying stock occurs — and strategist Chris Tyler
fly’s center or middle strike. then, I’m less than excited about the S&C
+1104_Gentile_Tyler_QA.indd 1 2/24/11 9:33:00 AM

product review
MetaSwing 4
Northington Trading
9538 Alice McGinn Drive
Charlotte, NC 28277
Phone: 704 542-0156
Email: admin@metaswing.com
Twitter: @kirknorthington
Internet: www.metaswing.com
Product: MetaStock and TradeStation
add-on for volatility-based technical
analysis for traders of stocks, options,
and foreign exchange
Requirements: See Equis website
(needs MetaStock version 9.1 or
higher) or TradeStation website
Price: $99/month or $999/year
by Dennis D. Peterson
M
etaSwing is available as a set of
TradeStation EasyLanguage
and workspace files or as a Figure 1: chart of boeing (ba) using the metaswing 4.0 daily template. Blue and red arrows
MetaStock plug-in. MetaSwing uses identify potential changes in short-term price direction. Red and blue wavy lines are called N-bands and show high
and low price peaks and valleys based on historical volatility. Horizontal dashed red and blue lines show projected
historical price volatility as the basis for resistance and support and are based on the peaks and valleys of the two N-bands. Blue text identifies signals
building indicators. The previous review for possible entry. Two red and green ribbons below the price chart are trend indicators, while the two plots in the
of MetaSwing was for version 3.5, while subcharts at the bottom are trend-compensated overbought/oversold indicators.
this review covers version 4.
On the surface of it, not much has is new on the price portion of this chart the low price extremes are shown using
changed. Out of sight are the calculations are the words “buy” and “sell.” They are a wavy blue line and are referred to as
used to create two mechanical trading generated by one of the two mechanical N-bands. The horizontal dashed red and
systems. An attempt has been made to trading systems telling you it is time to blue lines are created by the peaks and
codify trading — that is, create a piece enter and exit a trade. What is also new are valleys of the two N-bands. Thus, the
of software reflecting the choices you revised and improved trend calculations N-bands represent current volatility ex-
make as a trader when using MetaSwing used for the green and red trend bands treme values, while the dashed horizontal
indicators. The beauty of doing this is shown below the price band. lines are projections forward. Because
that you can now trade this system over MetaSwing, as the name implies, is of MetaSwing’s fractal nature, these
various time frames, then collect and about swings and following a trend. But values are relative to the time frame of
analyze the outcome. of course what you want is an entry point the applied chart.
Before we examine the results, let at the beginning of the swing or trend. The Now that you can see how the blue
us first look at some of the MetaSwing approach followed by MetaSwing is to and red dashed horizontal lines are built,
indicators. use historical price volatility to find high note there are two extra pairs. That is
and low price extremes. The precedents because for the red high price peak and
MetaSwing templates for this approach can be found in option valley horizontal lines, another dashed
and indicators pricing, and for equities, the ability of Bol- line is added, one average true range
Using the M sw 4Daily template in linger bands to predict price change. (Atr) from each. The same thing is
MetaStock, you get a number of indica- Figure 1 may appear to be a bit busy, done for low price peak and valley lines.
tors on the price chart and four more in so I will explain what some of the pieces Why use Atr? Because you are looking
subcharts (Figure 1). Three additional are to make it easier to understand. Using for price extremes and prices that move
templates have been added for MetaSwing historical volatility, high price extremes outside of an Atr tend to revert to the
4, bringing the total up to eight. What are shown using a wavy red line, while mean. The red and blue dashed lines are
+PR MetaSwing.indd 1 2/23/11 5:44:28 PM

as effective as support and resistance
lines and are referred to in the videos
and documentation.
So what’s with the blue and red
arrows? Using a different set of mea-
surements, they indicate where price
direction is going to change direction,
which could mean going sideways or
reversing after being in either an uptrend
(upswing) or downtrend (downswing).
The arrows are generated using the Adeo
system from MetaSwing 3.5, so they
do not incorporate all of the logic that
is in the mechanized system. The blue
upward-pointing NE arrow is a discre-
tionary signal, meaning you need other
verifying information for a long position,
while the red downward-pointing SE ar- Figure 2: tradestation workspace for ba. Nearly identical in appearance to the MetaStock chart,
row is a discretionary signal for a short except the two trend indicators (red and green ribbon indicators) require TradeStation 9.0. This screen capture
was done with TradeStation 8.6.
position.
So what’s with the “123” and the
“buy” and “sell”? These are the symbols Compression is occurring because the having to use a histogram to create the rib-
uniquely generated in version 4 for the line 1 Atr from the high price peak bon you see. Finally, the bottom subchart,
two mechanized trading systems, with line (line 2) is less than one Atr from the Msw Max Drlr Delta 20, is below
“buy” and “sell” coming from the Adeo the line that is the high price valley line zero, indicating an oversold condition.
system and “123” coming from the 123 (line 3). When the SR lines 1 and 2 reset If you follow Pristine, you’ll recognize
trading system. For Adeo, explicit entry upward, the compression condition ends. the entry MetaSwing is identifying, be-
and exits are identified, while the 123 Resistance rises to a higher level, clearing cause it would be on the next trading day,
system simply identifies the signal with the way for uptrend movement. December 21, which is a Cog (changing
the blue “123” text. Not only that, a couple of other things of the guard) period. It follows three days
So what’s an example of a good trade are happening. Note the nifty red and of lower highs, except MetaSwing is get-
setup looking at all of the information green banners below price. The top rib- ting there with nothing but pure math.
on the price chart? The blue arrow in the bon with the bear and bull icons, which MetaSwing is also available for
later part of December 2009 identifies the is an intermediate trend indicator, is TradeStation users. After pasting a couple
trade. Why? First, there is a blue arrow, green, and the swing filter banner is also of files into the TradeStation program
which is a signal in itself. Second, note green. If you are going long, you want folder, pasting 10 workspace files into
that both the upper (red) and lower (blue) both to be green. In addition, the swing the My Work folder and importing one
bands are angled upward, indicating an filter serves a trend weakness warning Eld, you can get the same chart (Figure
uptrend, and remember MetaSwing is a beacon when it is blank. 2) seen in Figure 1. MetaSwing also uses
trend-following system. It signifies a ris- As a technical note, the way the top a locally run active license that syncs
ing trend because immediate support and ribbon is created is different than the one with their hosted licensing server. This
resistance are both going higher. Third, beneath. The top one uses MetaStock’s ensures that the system is not hacked,
note that price stayed in a channel created expert advisor technology, but the bottom copied around, and overtraded.
by lower of the two red dashed lines — that one had to be created using a histogram.
is, the valley of historical high prices and An artifact of the histogram interface is Reports
one Atr below the valley and has dipped that you will see slivers of white appearing You can screen for the potential trades
below on December 18. Fourth, the four between rectangles of green (or red). The using either MetaStock or TradeStation.
red dashed lines are compressed coming white slivers are not an indication that When you do, you will get a report
into December 18. Compression occurs the swing filter is not seeing a bullish or similar to the one offered daily on the
when lines 2 and 3, or lines 6 and 7, are bearish move but is simply an artifact of Internet (found at www.metaswing.com)
less than one Atr apart.
Visually, this causes the pairs of
lines to appear tightly bunched. For the The beauty of doing this is you can trade
purposes of our discussion, the eight this system over various time frames,
horizontal lines are numbered from 1 then collect and analyze the results.
to 8, with the 1 line being the highest.

MetaSwing
4 is a big did they do?
effort on In examining Figure 4, what you
should see is that the center of the dis-
the part of tribution is not over zero but somewhere
developer just past 10%, and this is why you see the
Kirk text at the left read “Simple mean return
Northington. 13.3%.” The distribution is shifted to the
side of making a profit. If the y-axis scale
This is good for the chart seems odd, remember that
stuff. what you want is for the total of all the
bars in this histogram-like chart to add
up to 1. There is a very small chance you
could lose 40%, but you have an even
better chance of making 85%. Clearly,
the odds are stacked in your favor.
Figure 3: Website Daily Report. Different sets of analysis are available via
tabs at the bottom. For this screen capture MSW4Systems was selected. The results You can improve your odds by using
list the tickers for the choices that the two mechanized systems would choose. Placing intraday data. All of the indicators, ex-
your cursor over headings results in an information bubble appearing. cept the divine, are fractal in nature, so
they can be used in lower time frames.
In fact, you’ll see stocks exceeding the
to subscribers (Figure 3). Thus, you have achievement that MetaSwing has been upper N-band on the 15-minute charts:
a choice: Either generate your own or use able to accomplish this feat. Breaking that kind of resistance is defi-
the website. It is an important distinc- Now that you have coded all this dis- nitely bullish.
tion, because some users have found cretionary logic, what do you do next?
that MetaSwing’s design to illustrate ex- Pick a period of time, and pick random Summary
tremes is useful for countertrend trades, trades — that is, pick one of the tickers It’s a comfort that other trading systems,
using the platform of their choice. from a list like the one shown in Figure 3. through entirely different techniques, ar-
Randomly picking from a set of items is rive at the same answer that MetaSwing
Performance referred to as a Monte Carlo simulation. does in terms of when to enter a trade.
Incorporating all the discretionary analy- MetaSwing used 10 trades as a sample Moreover, it would be surprising if you
sis into code that is performed before point. In MetaSwing’s documentation, couldn’t improve on the Monte Carlo
taking a trade is very difficult. But if you will read about 10 consecutive trades simulation average simple gain by pay-
you are selling a product, you know in that you take the profit or loss from the ing attention to which sector is hot or at
that the unbiased performance can only first trade and use the resulting money least using stops. This approach leaves
be demonstrated if it is all coded up. for the second and so on. This is also the moving averages and all the usual
Trading systems based on visual clues referred to as compounding. MetaSwing suspects behind and has the sophistica-
are especially difficult. So it is no minor also has the simple mean return. So how tion of one of the better trading systems.
MetaSwing 4 is a big effort on the part of
developer Kirk Northington. Congratula-
tions. This is good stuff.
Dennis Peterson is a Staff Writer for

Stocks & Commodities.
Suggested reading
Northington, Kirk [2009]. Volatility-
Based Technical Analysis, John Wiley
& Sons.
‡MetaSwing 4
Figure 4: Excerpt From Performance Report. The distribution analysis for both Adeo long and 123
long are covered in the report, and one page from the report is shown. What this page shows is that choosing
trades at random over an eight-year period of typical market behavior, within S&P 500 stocks, odds favor you’ll
make money. In fact, you stand a better chance of making 85% than you do of making ‑40%, but you should expect
13.3% — all of this without money management, complex stops, or the use of intraday data. S&C

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product review
NinjaTrader 7
NINJATRADER, LLC need to come up with various scenarios to of flexibility and is very user-friendly.
1236 Clarkson Street tackle different market conditions. Each chart is a free-floating window,
Denver, CO 80218 Judging by the features available in so there is no limit to the number of
Fax: 801 806-2591 NinjaTrader 7 (NT7), I assume the de- windows you can use. You can place
Internet: www.ninjatrader.com velopers created this product with trade charts of different time frames of the
Requirements: Window XP/ management as its focus. The product same instrument within one window.
Vista/7/2003; minimum screen has a very rich set of features aimed at When you do this, you’ll see that the data
resolution of 1024x768; minimum P4 making trading for scalpers, swing trad- along the horizontal axis is aligned with
processor or higher; Microsoft.Net ers, futures traders, currency traders, and the different time frames. This makes it
Framework 3.5; data provider equity traders more efficient. very easy to see the price relationships
Product: Trading software for the of the different charts.
active trader Installation and data You can also overlay charts with other
Price: Unlimited free version; payment Installation only took a few minutes. charts or indicators. In Figure 1 you can
plans vary for live trading. See website You need to enter a product license key. see a daily chart of the Nasdaq futures
NinjaTrader has partnered with several with the stochastic overlaid on it. What
by Jayanthi Gopalakrishnan datafeeds and brokerages. A complete is interesting here is that you can drag
list is available on the company’s web- and drop the indicator to determine the
W hen it comes to trading, there

are only a few things you can
site. You can also use their preferred
data provider Kinetick (www.kinetick.
best scale to use for the stochastic.
Often when you overlay one price
control. These include the size of your com), which starts at $50 per month for series over another, it can be difficult
positions, your entry, and your exit. When real-time service and is a free end-of- to see the data, but you have options to
you are trying to trade in a fast-moving day datafeed. change colors or do what is referred to as
market, you must make decisions about box style. For example, you could have
your position size, entry, and exit very Charting daily and hourly charts of the same instru-
quickly. To prepare yourself to do that, you The charting feature in NT7 has a lot ment. In this case, you would apply the
Figure 1: charting features. The charting feature in NinjaTrader 7 is very flexible. You can overlay more than one chart, indicators on charts and indica-
tors on indicators.
+PR NinjaTrader.indd 1 2/23/11 5:34:18 PM

Although this is only a brief overview, I
hope you get an idea of how the product
is beneficial for managing your trades.
box style to the daily chart and see how Say you are a scalper and you want to
the price movement on the hourly chart trade four emini contracts. You may want
moves within the daily time frame. to take off two contracts after the first
You also have the option of nesting profit target has been hit, one when the
indicators on indicators. For example, second target has been hit and your last
if you have stochastics displayed in one contract when the third target has been
panel, you can plot the moving average of reached. You can select the parameters
the stochastic over the indicator. You can for your stop-losses for the three targets
nest as many indicators as you like. and your profit targets.
There are also various different chart You can also manage your stop strate-
types in addition to your regular bar, gies. Once you have created a strategy,
candlestick, and line. These include it is a good idea to name the template
heikin-ashi, kagi, renko, point & figure, and save it so you can use it later. You
and line break. should save different templates for dif-
A few unique features in the drawing ferent market conditions. This helps
objects are included in NT7. For example, you make quick decisions when you are
if you use the ruler to draw a line from a trading in a fast market. Once you have
low to a high point, you can measure the all your ducks lined up, you’re ready to
number of bars between the two points, conquer the market.
the change in price, and the change in
time. When you draw your Fibonacci Depth of market (DOM)
retracements, you can set up the different NT7 includes a feature called “super
retracement levels so each have a unique Dom,” which is a real-time display of
look, making it easier to identify each of price levels at the bid and ask. The center Figure 2: advanced trade management. This
them on a chart. You’ll find a lot of these column displays the current price. You is a simple way to set all your profit and stop targets
little details all over the program. Obvi- have a choice between a static super before entering a trade.
ously, a lot of thought has gone into the Dom and a dynamic super Dom. They
development of this product. have subtle differences. the control key plus the middle mouse.
NT7 includes chart-based order entry. As with most features of NT7, you I should mention that you can use hot
This gives you the luxury of entering your can customize the Dom. All you have to keys to place your trades. A list of the
trades soon after doing all your technical do is use the right-click option on your hot keys are available.
analysis on your charts. I mentioned that mouse to view all your options. Once you
NT7 focuses on trade management. This is are satisfied with your Dom, remember A disciplined approach
through their advanced trade management to save it. You can have multiple Doms Although this is only a brief overview
(Atm) strategies, which in my opinion is open at one time. of what NT7 offers, I hope you get an
what sets this product apart. Essentially, the Dom is used for plac- idea of how the product is beneficial for
ing your orders. This you can do with managing your trades. It’s easy to press
Advanced trade a mouse-click. It can’t get much faster a buy or sell button, but having a trade
management (ATM) than that. You set your parameters such as management strategy in place before
Predefined strategy templates are avail- quantity, time in force, or Atm strategy. hitting that buy or sell makes you a more
able, but you can modify them by creating You can place market orders by click- organized trader. We always hear about
rules and conditions in line with what ing “market” on either the bid or ask, needing to take your emotions out of
you require. NT7 gives you the option depending on whether you want to go your trading, and this may be the way
of creating your own trading strategies long or short. To close the position, all to do that. And the nice thing is that you
using NinjaScript. Once you create a you have to do is click on “close.” can enjoy what the software has to offer
strategy, you can test it and apply it to Your trades are not limited to market without paying a cent until you trade
your trading. The Atm allows you to se- orders. You have the option for placing through your live brokerage account.
lect your trading instrument, the quantity, limit orders, stop limit orders, and stop
and your strategy (Figure 2). market orders. For limit orders, you have Jayanthi Gopalakrishnan is Editor for
Depending on the type of trader you to hit the left-click button, for stop limits Stocks & Commodities.
are, you can select your Atm strategy you need the middle mouse-click, and ‡NinjaTrader 7
parameters for up to three profit targets. for stop market orders, you need to hit S&C
+PR NinjaTrader.indd 2 2/23/11 5:38:16 PM

To download the EasyLanguage code for the indicator, go to
For this month’s Traders’ Tips, the focus
the TradeStation and EasyLanguage Support Forum (https://
is Giorgos Siligardos’ article in this issue,
“Identifying Cup Formations Early.” One ad- www.tradestation.com/Discussions/forum.aspx?Forum_
ditional Traders’ Tip is contributed for Peter ID=213) and search for the file “_CupFormation.Eld”.
Konner’s article in the January 2011 issue of A sample chart is shown in Figure 1.
S&C, “Combining Rsi with Rsi.” This article is for informational purposes. No type of trading or
Code for MetaStock is already provided in investment recommendation, advice, or strategy is being made, given, or
Siligardos’ article. Subscribers will also find in any manner provided by TradeStation Securities or its affiliates.
the same code at the Subscriber Area of our website, —Chris Imhof
www.Traders.com. Presented here is an overview of pos- TradeStation Securities, Inc.
sible implementations for other software. A subsidiary of TradeStation Group, Inc.
www.TradeStation.com
Traders’ Tips are provided to help the reader imple-
ment a selected technique from an article in this issue.
The entries are contributed by various software develop-
ers or programmers for software that is capable of cus-
tomization.
Readers will find all the code listings that accompany F BLOOMBERG: Identifying Cup Formations Early
the following Traders’ Tips at our website, Traders.com. The semi-cup formation, as described in “Identifying Cup
Provided here is some discussion of the technique's im- Formations Early” in this issue by Giorgos Siligardos, has
plementation by the Traders’ Tips contributors as well as now been added to the chart studies available on Bloomberg
some example charts. Terminals.
To locate Traders’ Tips at our website, use our site’s
This indicator is displayed on the price chart in order to
search engine, or click on the Traders’ Tips link from our
home page. For past Traders’ Tips, click on the “Stocks help identify cup formations at an early stage of development.
& Commodities” link from our home page in the red box While later confirmation of the cup formation is necessary,
on the left, then click on the “Article Abstracts” link in the this type of early phase identification can give traders an
red box on the left, then click on the issue of interest, then excellent way to narrow down their selection of markets that
on “Traders' Tips.” may be preparing to trigger an entry after the development
of the full cup formation.
Using the CS.Net framework within the Stdy<GO>
function on the Bloomberg Terminal, C# or Visual Basic code
can be written to display the SemiCup indicator (Figure 2).
F TRADESTATION: Identifying Cup Formations Early
The C# code for this indicator is shown at www.Traders.com
In “Identifying Cup Formations Early” in this issue, author
in the Traders’ Tips area. All Bloomberg code contributions to
Giorgos Siligardos describes an algorithm to identify pos-
Traders’ Tips can also be found in the sample files provided
sible cup formations early by detecting roughly the first half
with regular Sdk updates, and the studies will also be included
of the formation.
in the Bloomberg global study list.
We have prepared the indicator code (_CupFormation) —Bill Sindel
to implement the algorithm described in the article as well Bloomberg, LP
as to provide an alert and a dot that is plotted when the cup wsindel@bloomberg.net
conditions are all met. The indicator can also show historical
formations by setting the “ShowHistory” input to true.
Figure 1: TRADE
STATION, CUP FOR
MATION IDENTIFI
CATION INDICATOR.
Here is a daily chart of
CAK with the indicator
applied. The magenta Figure 2: BLOOMBERG, CUP FORMATION IDENTIFICATION INDICATOR. Shown
marker indicates that here is a chart of Laboratory Corp. (LH). In his article, Giorgos Siligardos shows a
all of the requirements chart of LH (Figure 7 in the article) that shows a shaded area where the semi-cup
for the _ cup have been would have formed and then failed. Here, we show LH ending in the area of the shaded
met on the bar that is box on the original chart, with the semi-cup forming before the point at which it failed
marked. to complete the cup formation.
+Traders_Tips_1104.indd 1 2/23/11 7:00:21 PM

Figure 3: THINKORSWIM, CUP FORMATION IDENTIFICATION
FIGURE 4: eSignal, Watch List window. The isSemiCup formula

highlights from a custom list of symbols those that are currently meeting
F Thinkorswim.com: Identifying the criteria for the cup formation.
Cup Formations Early
Giorgos Siligardos describes an algorithm for identifying
possible cup-and-handle formations.
We have created two study files utilizing our proprietary
programming language, thinkScript. When applied, the studies
provide the algorithm for Siligardos’ methodology.
The code, along with instructions for applying it, is shown
at www.Traders.com in the Traders’ Tips area.
A sample chart is shown in Figure 3.
—Thinkorswim
F eSIGNAL: Identifying Cup Formations Early

For this month’s Traders’ Tip, we’ve provided the formulas
Figure 5: eSIGNAL, semi-cup study. Clicking on a symbol in the Watch
SemiCup.efs and isSemiCup.efs based on the formula code List will send that symbol to the chart, if the Watch List is linked to a chart. The
from the Giorgos Siligardos’ article in this issue, “Identifying SemiCup formula draws the semi-cup indicator on the chart so the user can
Cup Formations Early.” view current price action relative to the cup formation.
With eSignal’s new 11.0 application, it is now possible to
apply Efs formulas to a Watch List window. This month’s
article provides a practical example of how one might use for identifying a semi-cup or no semi-cup states, which may
this new feature. The isSemiCup formula has been designed be configured through the Edit Chart window. The SemiCup
specifically for the Watch List, which highlights from a custom study also has an option to hide or show the grid. The SemiCup
list of symbols those that are currently meeting the criteria study may also be used with eSignal 10.6.
for the cup formation (Figure 4). This formula displays the To discuss this study or download complete copies of the
text message “Semicup” or “No cup” for each symbol. This formula code, please visit the Efs Library Discussion Board
study column can then be manually or automatically sorted forum under the Forums link from the Support menu www.
to bring the list of symbols to the top to quickly identify the esignal.com or visit our Efs KnowledgeBase at http://www.
symbols that have formed the cup formation. If the Watch esignal.com/support/kb/efs/. The eSignal formula scripts (Efs)
List is linked to a chart, clicking on the symbol will send that are also available for copying and pasting from the Stocks
symbol to the chart (Figure 5) to view current price action & Commodities website at Traders.com.
relative to the cup formation, which is being drawn by the —Jason Keck
SemiCup formula. Interactive Data Desktop Solutions
Both studies contain formula parameters to set the colors 800 815-8256, www.eSignal.com/support/

Figure 6: WEALTH-LAB, CUP FORMATION IDENTIFICATION INDICATOR. Figure 7: AMIBROKER, CUP FORMATION IDENTIFICATION INDICATOR.
After a few semi-cup failures (red arrows), AAPL formed the mother of all cup and This sample weekly chart of AT&T shows detected semi-cup formations (red
handles in early 2003. Note that in the daily chart (inset), the mother cup spawned line). Parameter=1.5, selected date = 07/24/2009
two “nested” semi-cups.
F aMIBROKER: Identifying Cup Formations Early

F wEALTH-LAB: Identifying Cup Formations Early In “Identifying Cup Formations Early” in this issue, author
This Traders’ Tip is based on “Identifying Cup Formations Giorgos Siligardos presents a pattern-detection formula for
Early” by Giorgos Siligardos in this issue. cup formations.
Unsatisfied with scanning only for current semi-cups, we Our AmiBroker Formula Language implementation is
modified Siligardos’ excellent algorithm to be more apt for based on the algorithm given in Siligardos’ article; however,
backtesting by identifying and drawing every semi-cup detected it operates not only on the last bar but also on user-selected
in a chart. By keying off of minor peaks and assuming that bars. We have prepared a ready-to-use AmiBroker formula,
a semi-cup forms after each one, the amount of processing which can be viewed at www.Traders.com as well as at www.
is greatly reduced and simultaneously eliminates the need amibroker.com. To use the formula, enter the code set in the
to look back to an arbitrary level above the current price. Afl Editor, then press “Insert Indicator” or the “Send to
To reduce the number of second peaks that form the same Automatic Analysis” button. In the indicator mode, you can
semi-cup, we added an extra grid constraint, making the move the vertical selection line to check for the cup formation
second column in the top row a “yellow box,” as described on any date (not only the last bar). In the exploration mode,
in Siligardos’ article. you simply run the exploration and it will list detected cup
Once a semi-cup is detected, only two possible outcomes formations if any are present for the date selected as the end
exist: it fails by making a new low or it starts turning up. of the exploration range.
New low failures are recorded for each semi-cup and the A sample chart is shown in Figure 7.
peak pattern reenters “search mode” on the following bar, at —Tomasz Janeczko, AmiBroker.com
which time the grid is recalculated based on the new L0 low. www.amibroker.com
Most often, a new semi-cup is detected immediately. On the
other hand, if price turns up and exceeds the L2 level, this
is judged as a success and the semi-cup is frozen. In either F NEUROSHELL TRADER: Identifying Cup
case, the outcome is important to evaluate at every bar when Formations Early
backtesting, and these are indicated visually by red and blue The indicator used in “Identifying Cup Formations
arrows. Using the information in our semi-cup objects, we Early” by Giorgos Siligardos in this issue can be implemented
can even display the reference grid (Figure 6). in NeuroShell Trader using NeuroShell Trader’s ability to call
At the time of this writing (mid-February), an S&P 500 scan external programs. The programs may be written in C, C++,
for semi-cups with a minimum of 30 weekly bars returned the Power Basic, or Delphi.
following stock symbols: Aee, Aye, Erts, Etfc, Exc, FE, Gme, After moving the MetaStock code given in Siligardos’
Hrb, Key, Lll, Lly, MO, Pbi, Ppl, Sai, Vlo, and Wfr. article to your preferred compiler and creating a Dll, you
—Robert Sucher can insert the resulting SemiCup and SemiCupPlot indicators
www.wealth-lab.com as follows:

Figure 9: AIQ SYSTEMS, SAMPLE RESULTS FOR semi-cup formation
SYSTEM. Here, a sample trading system using 76 actively traded NASDAQ stocks
tests the semi-cup formation as an entry technique. For the test period 1/3/2000
to 1/6/2011, the average annual return was 18.8%, with a maximum drawdown of
68.8% on 11/20/2008.
Figure 8: NEUROSHELL TRADER, CUP FORMATION IDENTIFICATION
INDICATORS. This sample NeuroShell Trader chart demonstrates the
SemiCupPlot and SemiCup indicators.
1. Select “New Indicator…” from the Insert menu.

2. Choose the External Program & Library Calls category.
3. Select the appropriate External DLL Call indicator.
4. Set up the parameters to match your DLL.
5. Select the Finished button.
Users of NeuroShell Trader can go to the Stocks &

Commodities section of the NeuroShell Trader free technical
support website to download a copy of any of this or any past Figure 10: AIQ SYSTEMS, revised results with market timing added.
Traders’ Tips. For the refined semi-cup system, over the test period 1/3/2000 to 1/6/2011, the average
annual return was 10.1% with a maximum drawdown of 25.6% on 7/17/09.
A sample chart is shown in Figure 8.
—Marge Sherald, Ward Systems Group, Inc.
301 662-7950, sales@wardsystems.com 4. Size each position at 10% of total account equity recom-
www.neuroshell.com puted every day.
For the test period 1/3/2000 to 1/6/2011, the average annual
F AIQ: Identifying Cup Formations Early return was 18.8% with a maximum drawdown of 68.8% on
I have prepared the Aiq code based on Giorgos 11/20/2008. Although the return is reasonably good, the
Siligardos’ article in this issue, “Identifying Cup maximum drawdown is larger than most could tolerate. With
Formations Early.” (The code can be viewed at www.Traders. this in mind, I added a very simple market timing technique
com.) I devised a trading system using the Russell 1000 list that added the following rules:
of stocks to test the semi-cup formation as an entry technique. 1. Longs can only be entered when the S&P 500 is trading
The trading rules for the system are as follows: above its 200-day simple moving average for two or more
Entering a long position: consecutive days.
• Using a daily time frame, enter a long position when a 2. Exit all positions when the S&P 500 falls below its 200-
semi-cup formation is first detected. day simple moving average for two or more consecutive
• Enter the next bar at the open using a market order. days.
Exiting a long position: For the test period 1/3/2000 to 1/6/2011, the average annual
• Use a trailing 25% exit, or return was 10.1% with a maximum drawdown of 25.6% on
• Protect 100% of a 15% or greater profit. 7/17/09 (see Figure 10). The drawdown was significantly
• Exit the next bar at the open using a market order. reduced by the addition of the simple market timing technique.
Although the average annual return was also reduced, the
Short positions were not tested. Sharpe ratio increased from 0.47 to 0.75, indicating a less
In Figure 9, I show the results of simulated trading on the risky approach.
Russell 1000 stocks, using the following parameters: The code and Eds file can be downloaded from www.
1. Maximum positions per day = 3 TradersEdgeSystems.com/traderstips.htm.
2. Maximum total positions allowed = 10 —Richard Denning
3. Choose weakest candidates using 32-bar Aiq relative info@TradersEdgeSystems.com
strength for AIQ Systems

Figure 11: TRADERSSTUDIO, SEMI-CUP SYSTEM. Here is the Figure 12: TRADERSSTUDIO, DRAWDOWNS. Here is the Figure 13: TRADERSSTUDIO, ANNUAL
equity curve for the semi-cup system over the period 1/2/1996 to underwater equity curve for the same system over the period RETURN. This table shows the yearly returns
2/4/2011 trading a portfolio of 76 actively traded NASDAQ stocks. 1/2/1996 to 2/4/2011. for the sample system, based on starting
The system uses detected semi-cup formations as a market entry capital of $250,000.
technique.
F TRADERSSTUDIO: Identifying
The TradersStudio code based on Giorgos F STRATASEARCH: Identifying Cup Formations Early
Siligardos’ article in this issue, “Identifying In “Identifying Cup Formations Early” in this issue, author
Cup Formations Early,” is shown at www. Giorgos Siligardos offers a nice premise. If cup formations
Traders.com. I devised a trading system us- can be identified early, prices will be relatively low and
ing 76 actively traded Nasdaq stocks to test the semi-cup stop-losses should be easy to set. There are, however, several
formation as an entry technique. The trading rules for the hoops one must go through to create a working system with
system are as follows: such an approach.
Although the semi-cup algorithm cannot be used for
• Using a daily time frame, enter a long position when a
backtesting, we ran a rather primitive backtest by identifying
semi-cup formation is first detected.
semi-cup formations six months prior. Then, after importing
• Enter the next bar at the open using a market order.
current prices, we were able to evaluate how frequently the
• Exit a long position after holding for 10 bars.
semi-cup formations led to a significant increase in prices in
Short positions were not tested. the following six months. In our tests, more than half of the
I used the EquitySizeEvenlyWithFilters trading plan to stocks did have significant price increases after signaling a
run a trading simulation. This trading plan comes with the semi-cup formation. Identifying when to exit those positions
TradersStudio software. I used the following parameters: was still an issue, since high volatility was often present, and
many stocks did not recover significantly during that time.
Session : parameter = 2, exitBars=10, startDte=0960102 Nevertheless, the early signal proved to be quite effective for
(01/02/1996)
those stocks matching the pattern correctly.
TradePlan: MaxPos=10,PerPeriod=80,
FilerType=0,PerPeriod=80 StrataSearch users can download a plug-in from the Shared
Area of the StrataSearch forum, allowing immediate access to
In Figure 11, I show the resulting equity curve, and in Figure
12, I show the resulting underwater equity curve. In the table in
Figure 13, I show the year-by-year returns for the system. The
total net profit for the period was $1,167,424 with a maximum
drawdown of $918,313 (59.5% on 11/20/2008).
The code can be downloaded from the TradersStudio website
at www.TradersStudio.com→ Traders Resources→ FreeCode
or www.TradersEdgeSystems.com/traderstips.htm.
—Richard Denning
info@TradersEdgeSystems.com
for TradersStudio
Find the complete collection of

Traders’ Tips and code at our website, Figure 14: STRATASEARCH, Semi-Cup Scan Results. The IsSemiCup algorithm
www.Traders.com. identified a large number of stocks and ETFs when run against the entire market on
February 7, 2011. A chart of CTRN, highlighted above, can be see in Figure 15.

Figure 16: NINJATRADER, CUP FORMATION IDENTIFICATION INDICATORS.
This screenshot shows the SemiCup and SemiCupInternal indicators applied to a
Figure 15: StrataSearch, Semi-Cup Chart. As identified by the curved red daily chart of American Eagle Outfitters (AEO).
line, a cup formation may be in its early stages.
the semi-cup scan and charts (samples shown in Figures 14 Those who cannot access the library due to a firewall may
and 15). Users may also want to experiment with supportive paste the code (shown at www.Traders.com) into the Updata
trading rules that would provide early indications that the Custom editor and save it.
semi-cup is indeed turning into a full cup. A sample chart is shown in Figure 17.
—Pete Rast, Avarin Systems, Inc. —Updata Support team
www.StrataSearch.com support@updata.co.uk, www.updata.co.uk
F MICROSOFT EXCEL: Identifying

F NINJATRADER: Identifying Cup Formations Early In “Identifying Cup Formations Early” in this issue, author
The semi-cup indicators discussed in “Identifying Cup For- Giorgos Siligardos includes a sidebar with an algorithm coded
mations Early” by Giorgos Siligardos in this issue have now for MetaStock that implements his technique for identifying
been implemented as two indicators available for download cup formations before they have fully formed.
at www.ninjatrader.com/SC/April2011SC.zip. The “Basic code” section of that MetaStock example
Once the two indicators have been downloaded, from within allows for a straightforward translation into a Microsoft Excel
the NinjaTrader Control Center window, select the menu File→ worksheet. Thus, I was able to take the time to also provide
Utilities→ Import NinjaScript and select the downloaded file. a couple of usability features.
These indicators are for NinjaTrader version 7 or greater. Without an Excel-accessible price history database to scan,
You can review the indicator source code by selecting the this Traders’ Tip is a static solution. The user must capture
menu Tools→ Edit NinjaScript→ Strategy from within the historical price data for a given stock or other tradable of
NinjaTrader Control Center window and selecting “SemiCup” Continued on page 82
and “SemiCupInternal.”
A sample chart implementing the two indicators is shown
in Figure 16.
—Raymond Deux & Art Runelis
NinjaTrader, LLC
www.ninjatrader.com
F UPDATA: Identifying Cup

Formations Early
Giorgos Siligardos proposes a method for the mechanical
recognition of possible cup formation patterns in time series
data. His indicator seeks to preempt a rally from the low
point by finding the left side and base in a precursor to a full
cup pattern.
The Updata code for this indicator has now been added FIGURE 17: UPDATA, CUP FORMATION IDENTIFICATION INDICATOR. This
to the Updata Indicator Library and may be downloaded chart shows the semi-cup formation detected in the S&P 500 stock Allegheny
by clicking the Custom menu and then “Indicator Library.” Energy Inc.

Mutual Funds
TRADERS'
RESOURCE
When investing with mutual funds, the issue
is cost of all kinds. Sales charges, turnover TOP 10 VIEWED
costs (trading costs), tax costs, management
fees, marketing costs, and cash-holding
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4. Federated American Leaders A Federated Investors, Inc.
funds that allows costless switching between funds can be
5. Strong Growth 20 Fund Wells Fargo Advantage Funds
beneficial in the long run.
6. Scudder Gold & Precious Metals Fund DWS Investments
After you’ve minimized costs, you can look at returns. The
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of the market indexes, such as the Standard & Poor’s 500. It’s 8. Fidelity Advisor Asset Allocation T Fidelity Investments
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costs of active management, so consider these index funds in These are the 10 mutual funds viewed most often on the Traders’ Resource website,
your research. where each company is listed in order of clicks received. This is not an editorial rating
Finally, consider balancing your portfolio between bonds or or ranking. For more information on specific products and services, try checking store.
money market funds and equity funds. A mix of bond funds Traders.com for archived S&C product reviews.
and equity funds is best for all but the youngest investor. This
portfolio diversification will help limit your risk while still Traders’ Resource at Traders.com
allowing for respectable returns. In addition to our listing of mutual funds at Traders.com,
You’ll find a list of some mutual funds and mutual fund you’ll also find listings of other trading-related products
houses at our website in the Traders’ Resource database. and services such as brokerages, data services, courses and
seminars, software, publications, trading systems, and more.
We hope this will help you learn about products to help in
your trading endeavors.
To reach the Traders’ Resource area of our website, just click
on the Traders’Resource link from Traders.com. Then follow the
category link for
mutual funds, or
use the search
feature to find
products or ser-
vices with spe-
cific attributes
in this or other
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+1104 Books for Traders.indd 1 2/24/11 6:05:00 PM

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

Commodity Futures Exchange % Margin Effective Contracts to Relative Contract Liquidity
% Margin Trade for Equal
Dollar Profit
Eurodollar Interest Rate CME 0.1 1.8 5 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>>
3 Mo Euribor Interest Rate LIFFE 0.1 1.0 3 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
Mini S&P 500 Index CME 8.6 17.4 8 •••••••••••••••••••••••••••••••
30 Day Federal Funds CBT 0.0 0.0 1 ••••••••••••••••••••••••••
3 Yr. Cmmnwlth T-Bonds SFE 0.0 0.5 1 •••••••••••••••••••••••
Short Sterling LIFFE 0.1 1.7 7 •••••••••••••••••••••
Crude Oil - Light Sweet NYM 5.3 8.0 4 •••••••••••••••••••••
Natural Gas NYM 12.1 4.9 3 •••••••••••••••••••
DJ Euro Stoxx 50 Index EUREX 7.2 13.4 12 •••••••••••••••
Brent Crude Oil IPE 4.3 6.7 4 ••••••••••••
S&P 500 Index CME 8.6 17.4 2 ••••••••••••
Corn CBT 5.9 8.1 10 •••••••••••
Gold 100 troy oz NYM 4.8 9.4 4 ••••••••
10 Yr Treasury Notes CBT 1.8 13.4 16 •••••••
Gas Oil ICE-EU 4.1 8.4 6 ••••••
5 Yr Treasury Notes CBT 1.1 8.5 17 ••••••
Xetra DAX-30 Stock Index EUREX 3.7 7.1 2 •••••
Soybeans 5000 bushels CBT 7.2 12.1 7 •••••
10 Yr German Euro Bund EUREX 2.2 19.0 13 •••••
FT-SE 100 Index LIFFE 5.0 17.9 10 •••••
2 Yr Treasury Notes CBT 0.4 5.2 17 ••••
RBOB Gas NYM 4.7 6.4 3 ••••
2 Yr Euro Schatz EUREX 0.3 5.8 32 ••••
Silver 5000 troy oz NYM 6.8 6.9 2 •••• CBT Chicago Board of Trade
Heating Oil #2 NYM 4.3 7.5 4 ••• CME Chicago Mercantile Exchange including
Mini Russell 2000 CME 5.5 10.7 6 ••• the International Monetary Market (IMM)
5 Yr German Euro BOBL EUREX 1.1 10.1 16 ••• CMX Commodity Exchange, Inc. CME Group
3 Mo EuroSwiss LIFFE 0.0 1.2 7 ••• EUREX European Exchange, Zurich & Frankfurt
Sugar-World #11 CSCE 17.2 23.9 11 •••
ICE-EU Intercontinental Exchange-Futures - Europe
Wheat - Soft Red CBT 8.5 13.6 11 •••
ICE-US Intercontinental Exchange-Futures - US
US Treasury Bonds CBT 3.1 23.4 17 ••
KCBT Kansas City Board of Trade
CAC-40 Stock Index MATIF 5.9 11.2 9 ••
Cotton #2 NYCE 10.4 12.3 3 •• LIFFE London International Financial Futures and
Mini-Nasdaq 100 Index CME 7.5 13.4 10 •• Options Exchange
Copper NYM 5.3 7.4 3 •• MATIF Marché à Terme International de France
Aust. Share Price Index SFE 5.0 12.9 6 •• NYM New York Mercantile Exchange
Swiss Market Index EUREX 7.5 16.3 8 •• SFE Sydney Futures Exchange
Long Gilt LIFFE 2.1 17.7 11 •
Soybean Oil CBT 6.2 10.0 13 •
Coffee C CSCE 6.1 9.5 4 •
Cattle - Live CME 3.0 8.3 16 •
Euro Currency € CME 2.5 14.9 9 •
Mexican Peso CME 5.3 5.7 7 •
Japanese Yen ¥ CME 4.0 12.4 5 •
Wheat - Hard Red KCBT 5.7 8.7 9 • 1104
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).
+1104 Futures Liquidity.indd 1 2/23/11 5:47:26 PM

At-the-Money (ATM) — Option whose Gann Theory —Various analytical techniques security or futures contract.
strike price is nearest the current price based on price, time, and pattern to project Pairs Trading — Taking a long position
of the underlying deliverable. changes in the direction of the markets. and a short one on two stocks in the
Backtesting — A strategy is tested or Heikin-Ashi — A Japanese visual technique same sector, creating a hedge.
optimized on historical data. that eliminates irregularities from a normal Put Option —Acontract to sell a specified
Call Option — A contract that gives the chart, offering a better picture of trends and amount of a stock or commodity at
buyer of the option the right but not consolidations. an agreed time at the stated exercise
the obligation to take delivery of the In-the-Money (ITM) — A call option whose price.
underlying security at a specific price strike price is lower than the stock or R/R Ratio—Reward/risk ratio. The ratio
within a certain time. future’s price, or a put option whose strike of profit target or trade gain and risk
Candlestick Charts —Acharting method, price is higher than the underlying stock or trade loss.
originally from Japan, in which the or future’s price. Relative Strength Index (RSI) — An
high and low are plotted as one line. Money Flow — A number of technical indicator used to ascertain overbought/
Covered Call — Selling a call option indicators that incorporate volume and oversold and divergent situations.
while holding an equivalent in the price action to measure buying or selling S&P Emini — Electronically traded,
underlying tradable. pressure. smaller-sized contracts of the Standard
Doji — A session in which the open and MovingAverage —Amathematical procedure & Poor’s 500.
close are the same (or close). to smooth or eliminate the fluctuations in Stochastics Oscillator —An overbought/
Elliott Wave Theory — A pattern- data and to assist in determining when to oversold indicator that compares
recognition technique published by buy and sell. today’s price to a preset window of
Ralph Nelson Elliott in 1939. Near-the-Money — An option with a strike high and low prices.
Exchange-Traded Funds (ETFs) — price close to the current price of the Volatility Index —Awidely used measure
Collections of stocks bought and sold underlying tradable. of market risk. Sometimes referred to
as a package on an exchange. Out-of-the-Money (OTM) — A call option as the “investor fear gauge.”
Fade — Selling a rising price or buying whose exercise (strike) price is above the
a falling price. current market price of the underlying S&C
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April 2011 • Technical Analysis of STOCKS & COMMODITIES • 79
1104_classified.indd 79 2/23/11 2:54:21 PM

Alpari Launches Trading Platform Global X launches new
for Institution Trading exchange traded Funds
The QuantumFX trading platform Global X Funds said it was now offer-
has been launched, Alpari announced. ing, with Russell Indexes, the Global
QuantumFX, which will provide cor- X Russell Emerging Markets Growth
porations, hedge funds, banks, and Etf (Emgx) and the Global X Russell
high-frequency trading institutions with Emerging Markets Value Etf (Emvx).
access to a diverse and deep liquidity These are the first exchange traded fund
pool, features anonymous trading via www.interactivebrokers.com
products that offer a way to play the
a central clearing counterparty model emerging markets through growth and
with multiple execution mechanisms. It program is offered for value styles, the company said.
also supports multiple order types and aspiring traders
execution algorithms that help minimize Patak Trading Partners and its new
market impact. recruiting division, TopStepTrader,
said they were making a trading ca-
reer attainable for both recent college
graduates and experienced traders
with the introduction of a training and
evaluation program. The TopstepTrader
recruitment process utilizes a program
to evaluate and monitor recruits’ trading
performance in a real-time, live market
simulation, then provides a risk-free
way for traders to gain experience in the
trading industry and test their strategies
www.alpari.com while being scouted by trading firms
and equity backers. For those learning www.globalxfunds.com
interactive brokers adds android to trade, TopStepTrader offers one- and
mobile trading solution, more four-week training sessions. OCE Interactive Releases
Interactive Brokers made some Comps Companion
announcements about their products Oce Interactive announced the release
recently. First, the company announced of Oce’s Comps Companion research
that MobileTws for Android has been platform, representing their latest inno-
added to its collection of mobile trading vation in relative valuation benchmark-
solutions, providing electronic access to ing of US equities. Comps Companion
the user’s IB account so he or she can follows Oce’s release of its Market
trade stocks, options, futures and forex, Topographer platform for researching,
view real-time charts and market data, benchmarking, and comparing US equi-
monitor trades, account balance and more ties. Comps Companion is driven by the
from the Android device. same core technology as Oce’s Market
Next, they said that two new trading Topographer platform.
products were now available through www.topsteptrader.com
their UK affiliate. IB Spot Gold gets ac-
cess to the London bullion market, while
IB UK Cfds (contracts for difference)
are over the counter and lets you trade
the difference between the current and
future price of a share. These products
are available to all non-US and non-
Canadian customers. IB Spot Gold is
available to US-based eligible contract
participants as determined by your ac-
count application.
Finally, IB said that residents of India www.markettopographer.com
could now short stock (Nifty 50 stocks www.pataktradingpartners.com
are available) on an intraday basis.
+1104 Trade News.indd 1 2/24/11 10:04:13 AM

CQG, ninjatrader collaborate on This is significantly different from third-party providers. PfgBest has also
Global Connectivity brokers who operate a dealing desk taken the development of Typhoon and
Cqg announced its collaboration with execution model, where the revenue per applied it to precious metals dealers for
NinjaTrader to allow global connectiv- trade is not as transparent, the company its affiliate, Pfg Precious Metals, Inc.
ity between their systems. The collabora- said. There are common practices that
tion gives traders using the NinjaTrader allow dealing desk firms to make more
7 platform the ability to connect to Cqg’s than just the markup attached to the prices
network exclusively for Amp Global streamed from large financial institu-
Clearing. In addition to providing access tions. These practices include but are
to Cqg’s trading gateways and market not limited to requoting customer trades,
data through this integration with Nin- taking the opposing side of customer
jaTrader, Cqg provides pretrade risk trades, and even preventing customers
capability, exchange compliance, and from trading or managing their positions
exchange reporting. during news events.
www.pfgbest.com
Commodity Futures Investing

www.cqg.com
events launched
Commodity Futures Investing
Community (Cfic) announced the
launch of a global series of commodity
www.fxcm.com futures investing events. This series is
focused on educating and empowering
PFGBEST Typhoon aggregates FX investors with knowledge and resources
liquidity from global providers to take advantage of opportunities in the
PfgBest, a global financial services global commodity futures and options
and technology firm, and Equinix, markets. The events are planned for
Inc., a provider of global data center North America, South America, Europe,
services, announced that PfgBest had and Asia, with each event featuring a
selected Equinix to host its Typhoon conference, seminars, and an exhibition.
direct market access solution for foreign The first event will take place March
www.ninjatrader.com
exchange trading. PfgBest is relocating 28–30, 2011, in Melbourne, FL.
its proprietary liquidity aggregation and
FXCM Launches Forex order routing system to Equinix’s New
Execution Center York International Business Exchange
The Fxcm Execution Center will be a to improve order routing performance
central hub on the Fxcm websites that and reduce latencies.
will provide forex traders with detailed Typhoon is a strict, no-dealing-desk
information regarding forex execution environment, which ensures client or-
practices with an agency execution ders are matched to the best available
model, the company said. Fxcm takes prices. Typhoon is a dynamic liquidity
the best bid and ask prices streamed to provisioning solution that can be tailored
them from multiple large financial insti- to meet the trading demands of all client
tutions, adds a commission, and shows types and can be accessed through all of
them to clients. Fxcm makes an identi- the PfgBest electronic trading applica- www.commodityfuturesinvesting.com
cal amount of money in the form of pip tions, including both proprietary plat-
markups, whether the customer makes forms and direct Api products. PfgBest
or loses money on a trade. As a result, created Typhoon as part of a strategy to
Fxcm earns consistent and transparent create and own technologies so clients
revenue per trade. are never at the mercy of vendors or S&C
+1104 Trade News.indd 2 2/24/11 10:04:32 AM

Continued from page 71
Figure 19: VT TRADER, RSI WITH RSI SYSTEM. Here is a trading system on a
daily candle chart of the EUR/USD based on Peter Konner’s RSI with RSI system
described in his January 2011 article in S&C.
Figure 18: EXCEL, CUP FORMATION. This chart shows an example of a “good”
semi-cup as identified by the Excel program.
This leads me to the second feature I was able to add. By
using separate input and calculations worksheets, combined
interest from sources like Yahoo! Finance, then massage the with the Offset technique, I was able to add a very simple
data as appropriate for the “adjusted closes,” and place the “data windowing” capability on the calculations and chart
result into the workbook. worksheet. For additional details, see the Notes tab for the
In my previous Traders’ Tips for Excel, adding or chang- sections, “Calculation and chart worksheet usage” and “Play
ing data was a problem because the solution formulas were with it.” A sample chart output is shown in Figure 18.
coded on the same sheet and in the same rows as the input —Ron McAllister, EXCEL and VBA Programmer
data. Thus, the solution formulas were inextricably tied to the rpmac_xltt@sprynet.com
location of input data cells and to each other, and inserting
a new data row unavoidably screwed up these relationships
without necessarily producing any outward sign that some-
thing was broken.
In this month’s worksheet that I created, you may safely
F VT TRADER: COMBINING RSI WITH RSI
alter the input data because the calculations have been iso-
Our Traders’Tip this month is based on Peter Konner’s article in
lated from the input data using an input data sheet and a sepa-
the January 2011 issue of S&C, “Combining Rsi with Rsi.”
rate calculations sheet. You may freely add data rows to the
In the article, Konner describes a trading system using
InputPriceData worksheet at the top, bottom, or middle of
fast/slow Rsi indicators and fast/slow moving averages for
the data detail section. Or you may completely replace the
identifying potential longer-term trading opportunities with
data detail rows. Just observe the following caveats: 1) Make
the prevailing trend as well as potential shorter-term trading
a backup copy first. 2) Be sure you don’t disturb the location
opportunities against the prevailing trend. Konner only dis-
of the headings in row 10 of the input sheet or the computa-
cusses countertrend trading against prevailing downtrends;
tions in input sheet cells B7:C7. That is to say, do not insert
however, we have added an additional set of “quick buy/sell”
or delete rows of the input sheet between rows 1 and 10, in-
rules for countertrend trading against prevailing uptrends as
clusive. 3) Do update the symbol and company name in input
well. A sample chart is shown in Figure 19.
sheet cell B2 if you change securities (see the Notes tab for
We’ll be offering our modified version of Konner’s Rsi
additional details).
with Rsi trading system for download in our VT client fo-
The SemiCupCalcAndChart worksheet obtains its data
rums at http://forum.vtsystems.com along with hundreds of
from the input worksheet using Offset references relative to
other precoded and free trading systems. The specific trading
the headings in row 10 of the input sheet. For example, any
rules used by the trading system are explained in its Notes
cell on the calculations sheet that uses an Offset reference to
section. The VT Trader instructions for creating the trading
the input sheet of cell “B10+1 row” will always retrieve the
system are shown at www.Traders.com.
current contents of cell B11 (even if you just inserted three
To learn more about VT Trader, visit www.vtsystems.com.
rows above what was the previous row 11). Likewise, any for- —Chris Skidmore
mula using Offset reference cell “B10+4 rows” will now re- Visual Trading Systems, LLC
trieve the data that was in B11 before the rows were inserted. 212 871-1747, info@vtsystems.com, www.vtsystems.com
The data moved, but the Offset formula references did not.
S&C

How do YOU like it?
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There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products. Past performance is not indicative of future results.


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