In-Sample, Out-Of-Sample-Does It Really Matter? An Etf Portfolio Based On Minimizing Drawdown

THE TRADERS’ MAGAZINE SINCE 1982
www.traders.com MAY 2022
IN-SAMPLE, OUT-OF-
SAMPLE—DOES IT
REALLY MATTER?
How to select data to use in
backtesting 8
AN ETF PORTFOLIO
BASED ON MINIMIZING
DRAWDOWN
A good risk management plan
will deal effectively with the
drawdowns that will occur 18
A CHECKLIST FOR
SUCCESSFUL TRADING
Boost your trading success
and daily productivity 22
INTERVIEW
Jon Wolfenbarger 30
AMPLIFY ETFS
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CONTENTS MAY 2022, VOLUME 40 NUMBER 6
6 Algo Q&A
by Kevin J. Davey
The Traders’ MagazineTM Got a question about system or algo
trading?
EDITORIAL
editor@traders.com
FEATURE ARTICLE
8 In-Sample Test Data, Out-of-
Editor in Chief Jack K. Hutson
Production Manager Karen E. Wasserman
Sample Data—Does It Really
Art Director Christine Morrison
Matter?
Graphic Designer Wayne Shaw
by Perry J. Kaufman
Webmaster Han J. Kim Backtesting a trading strategy or INTERVIEW
Contributing Editors John Ehlers,
trading system before trading it 30 A Conversation With
Anthony W. Warren, PhD. has always been an important part Jon Wolfenbarger
Contributing Writers Thomas Bulkowski, Martin Pring, of the system trader’s process. But by Karl Montevirgen
Barbara Star, Markos Katsanos, Leslie N. Masonson, what’s the best way to go about it? Jon Wolfenbarger, CFA, has over
Karl Montevirgen
Here’s an overview of the process 25 years of professional investment
and some finer points on how to experience. In addition, he spent
OFFICE OF THE PUBLISHER select data to use in backtesting. over three decades studying
Publisher Jack K. Hutson
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Algo Q&A
ALGORITHMIC TRADING
Have a question about system or algo trading? Kevin J. Davey has over
30 years of system trading experience. He is a full-time trader, and also
teaches and consults via his Strategy Factory online workshop (https://
kjtradingsystems.com). He is the author of five bestselling trading books,
including Building Winning Algorithmic Trading Systems and his latest
book Algo Trading Cheat Codes. Send your questions or topic suggestions
to Kevin Davey at kdavey@kjtradingsystems.com. Selected questions will
appear in a future issue of S&C.
Kevin J. Davey
SPEND MONEY TO MAKE MONEY? new highs are never more than three signals until the system hits a draw-
I find building trading algos difficult. months apart. So he decides he will down that is 1.5 times the maximum
Would I be better off purchasing a follow the signals for three months, drawdown—in this case around $825.
system, or subscribing to signals and if he has not made money in that Trader B feels that should provide
instead? time he will stop trading, with the as- ample cushion, realizing that draw-
There is no easy path to riches in sumption that the system is broken. downs always seem to be bigger in
trading, whether you try to develop Trader B is a bit savvier and un- the future.
your own algo, purchase a strategy, derstands that performance going Trader C decides to trade the system
or subscribe to signals. If you are forward will likely be worse than for 12 months, regardless of perfor-
looking at subscribing to signals, for mance. She realizes that she needs to
example, it is hard to base a decision give a system time to recover from
off the limited information you are
The phrase “past any drawdowns, and that random fluc-
usually provided. Let’s take an ex- performance is not tuations frequently occur in trading
ample and see why. indicative of future systems. She is in it for the long haul.
Figure 1 shows a well-performing results” definitely She will evaluate her performance
signal system over a number of years. applies. only after 12 months.
Many traders would be happy to have All three traders start at the same
such an equity curve. But could you what has happened historically. This point, and Figure 2 shows how they
make money following this strategy? is because of a “winning survivor” did.
We’ll look at three typical traders and bias; Trader B picked this strategy Trader A started out by immediate-
see how they do. We will assume they solely because it outperformed many ly hitting a three-month drawdown,
all begin live trading at the last point other strategies. But maybe it just had which had never happened before. He
on the curve. a run of good luck and as soon as he is convinced the system is broken,
Trader A reviews the live equity starts trading it, it will falter. curses the signal provider, and quits
curve of Figure 1, and notices that Trader B therefore decides to follow with a loss.
FIGURE 1: HISTORICAL PERFORMANCE FOR SIGNAL STRATEGY FIGURE 2: REAL-TIME PERFORMANCE, THREE TRADERS
Algo Q&A
Thrive With AbleTrend
Trader B holds on a bit longer, Buy on Blue and Sell on Red
but eventually succumbs to the 1.5
maximum historical drawdown. He
too loses money.
Trader C sticks it out for a year.
Only she is rewarded with profits.
However, this trader had to endure
three significant drawdowns, all of
which were larger than any historical
Downtrend Signaled
drawdown when she signed up. Luckily, on 12/01/2021
she had nerves of steel during those Before a 15% Decline in the Market
drawdowns. Psychologically, she had
a very hard time hanging on, but she
stayed with it when most others would The Decline of over 1,400 Points
have bailed. with Worth more than $28,000/contract
So out of our three traders, only
one made money, even though overall
the system made money over the 12
months. This, unfortunately, is pretty
typical of signal followers. Many of
the same factors that cause them to
lose with their own algos (fear, unre- Triple Confirmed Buy/Sell Signals
alistic expectations, not accounting for
randomness) also show up when they
follow signals.
What is the solution then? First, re- Traders Rave Over AbleTrend
alize that systems for sale and signals
are not necessarily better than algos
you can build yourself. In many ways,
ABLETREND 7.0 COLLECTED BY
since you are not privy to the inner SINCE 1994
workings of the signal systems, they

may actually be worse.
Second, understand that psychology
plays a major role in signal following
and in all algo trading. It is emotion-
ally just as hard if not harder to follow
signals as it is to follow an algo you
created.
Finally, remember that historical
performance you see for any signal or
system is just a hypothetical backtest
and will not necessarily have the same
performance going forward. The phrase
“past performance is not indicative of TEST DRIVE THE LATEST SIGNALS
future results” definitely applies.
In the end, as I mentioned earlier,
trading is hard. If you struggle to
build good algos, realize that buying
THESE RESULTS ARE BASED ON SIMULATED OR HYPOTHETICAL PERFORMANCE RESULTS THAT HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE THE RESULTS
SHOWN IN AN ACTUAL PERFORMANCE RECORD, THESE RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, BECAUSE THESE TRADES HAVE NOT ACTUAL-
LY BEEN EXECUTED, THESE RESULTS MAY HAVE UNDER-OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF
a strategy or subscribing to signals is LIQUIDITY. SIMULATED OR HYPOTHETICAL TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT
OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THESE BEING
not an easy alternative. SHOWN. THE TESTIMONIAL MAY NOT BE REPRESENTATIVE OF THE EXPERIENCE OF OTHER CLIENTS AND THE TESTIMONIAL IS NO GUARANTEE OF FUTURE
PERFORMANCE OR SUCCESS. TECHNICAL ANALYSIS OF STOCKS & COMMODITIES LOGO AND AWARD ARE TRADEMARKS OF TECHNICAL ANALYSIS, INC.
May 2022 • Technical Analysis of Stocks & Commodities • 7

SYSTEM TESTING
The Test Intervals Can Make a Difference
In-Sample Test Data,

Out-of-Sample Data—
Does It Really Matter?
Backtesting a trading strategy or trading system will perform now. But then the old data may not
before trading it has always been an important part represent current market conditions.
of the system trader’s process. But what’s the best 2. Use recent data for in-sample and older data for
way to go about it? Here’s an overview of the process out-of-sample so that the choice of parameters
and some finer points on how to select data to use reflects the current market moves. But then, how
in backtesting. good should the old data performance be to be
T
considered successful?
he “scientific way” to test is by using data 3. Use alternating, fixed-length test periods for in-
that is referred to as in-sample. You then use sample, with the out-of-sample data in between.
those results on out-of-sample data, that is, That should result in parameters that work across
data that the test has not seen before. We do changing market patterns.
the same for other futures or stocks to get a robust 4. Use alternating, random-length intervals, dif-
result. If the in-sample and out-of-sample returns are ferent for each market so that you are not fitting
consistent, then we are successful. If not, the trading each market to the same macro events, such as
system doesn’t work or we’ve overfit the data. But the financial crisis of 2008 or the bull market
even if the out-of-sample results are good, we may be that followed.
misleading ourselves into thinking that we’ve tested 5. Use walk-forward testing to simulate what might
correctly. actually be done in real life—retest when there
One of the problems with the scientific way is that is new data and use the results going forward.
we rarely follow the rules. We may use in-sample Repeat at fixed intervals.
data and then look at the out-of-sample results, but 6. Use all the data for testing but be sure there are
when the out-of-sample isn’t as good as we want, we enough trades to make it difficult to overfit. A
fiddle with the rules until the results look better. Then fast trading system over 20 years would be fine,
we’ve really used all the data and there is no data left but a macrotrend system that has only 10 trades
for validation. might not be good.
Here are the choices That’s a lot to look at, but it’s important to know the
Another problem is the way we choose our in-sample best way to test, and to be realistic about it.
and out-of-sample intervals. Let’s look at the op-
tions: Choosing the data
I’ll use the futures markets for this discussion because
1. Use old data for in-sample and recent data for it provides better diversification than stocks and the
KEN SMITH
out-of-sample. Then we know how well the system data goes back further than ETFs, even SPY. We will
by Perry J. Kaufman
choose one market from each of
five main sectors, US 30-year
bonds (US), the euro currency
(CU), the S&P index (ES), gold
(GC), and crude oil (CL). Except
for ES, which started trading
MICROSOFT EXCEL
in 1983, the others go back to
1978. That gives us over four
decades of data, which is neces- FIGURE 1A: US BOND FUTURES. In-sample test FIGURE 1B: US BOND FUTURES. Out-of-sample test
sary for testing long-term trend from 1978–2005. from 2006–2019.
following.
The strategy will be a moving
average system. The only rules
are buying when the trendline
turns up and selling when it
turns down. The tests will use
calculation periods for 5 days
to 150 days. There are no com-
mission or other costs. Costs FIGURE 1C: US BOND FUTURES. In-sample test FIGURE 1D: US BOND FUTURES. Out-of-sample test
would have greater impact on from 1996–2019. from 1978–1995.
the faster trends, which are not
our focus here.
Options 1 and 2:
Use old or new data
for testing
The most common tests use older
data to find the best calculation
period. We will use two-thirds
FIGURE 2A: EURO. In-sample test from 1978– FIGURE 2B: EURO. Out-of-sample test from
of all the data for testing, then 2005. 2006–2019.
look at how it worked on recent
data. The test period will be
1978 through 2005. The out-
of-sample period will be 2006
through 2019. There will be
groups of two results: in-sample
and out-of-sample.
30-year bond futures (US)

The first results, US, are shown FIGURE 2C: EURO. In-sample test from 1995–2019. FIGURE 2D: EURO. Out-of-sample test from
1978–1995.
in Figures 1a and 1b. We already
know that interest rates are the
most trending markets, so these results should not be a
surprise.
Tests of older data for US (Figure 1a) show profits for Even if the out-of-sample results
every moving average calculation period, but Figure 1b
are good, we may be misleading
shows that the more recent data favors the slower trends.
Had we picked the best result from the old data, which is ourselves into thinking that
the 30-day trend, we would have posted the largest loss we’ve tested correctly.
during recent years.
Reversing the test, using the recent data as in-sample
and the older data as out-of-
sample, we get slightly different
result (see Figures 1c and 1d).
Because the older data was far
more trending, any calculation
period would have been profit-
able. However, if we had chosen
the maximum return from the in-
sample, which is 105 days, then FIGURE 3A: S&P. In-sample test on older data. FIGURE 3B: S&P. Out-of-sample test on newer
the out-of-sample would have data.
been near the lowest returns,
although still good.
Euro currency
After the interest rates, the cur-
rencies are the next most trend-
ing markets. Figure 2a is the
in-sample test of the euro (CU)
from 1978 through 2005. Its FIGURE 3C: S&P. In-sample S&P results, long- FIGURE 3D: S&P. Out-of-sample results.
trending quality is seen by profits only.
in all calculation periods, similar
to US bonds during the same
years. It also favors the longer
periods in the more recent years.
Choosing the best from the older
data would not have given you
the best results recently, as seen
in Figure 2b.
Going backwards, we see a
FIGURE 4A: GOLD. The in-sample test shows profits FIGURE 4B: GOLD. The out-of-sample test shows two
different pattern, again similar in most calculation periods. distinct areas of profits.
to bonds. The best choice for the
in-sample would have been the
longer trend periods, which corresponds to the worse pe- Gold
riods in the out-of-sample data (see Figures 2c and 2d). Gold peaked in 1980 and drifted lower for the next 25 years
before showing signs of life in the 2000s. That is going
S&P 500 to make the old and new data very different. Figures 4a
Experience tells us that the S&P is noisy in the short term and 4b show how different they are. Gold peaked for the
but trending in the long term. It is one of the few mar- second time in July 2011, testing the $2,000 level before
kets that can profit from mean-reverting for fast trading falling back to below $1,200. Those large swings are the
and trend-following for slow trading. Figures 3a and 3b reason for the two areas of profits in the out-of-sample
confirm that. It also shows us that a trend system rarely period while the in-sample period was dominated by a
profits from a short sale. Downturns in the S&P are very slow drift down for 20 years.
fast, and trends are too slow to capture their profits. There Had we chosen either of the two in-sample peaks, 15
are exceptions, such as 2008, but with enough time, even days or 75 days, the out-of-sample returns would have been
those gains are offset by more losses. very small. Optimal past profits do not seem to align with
Given that S&P downturns are very fast, most traders recent profits. Results are similar if we use current data
favor only long positions in the S&P. Figures 3c and 3d for in-sample and forecast back to older data.
confirm that. Instead of profits that are limited to a few
slow trends, profits are in most trend periods except the Crude oil
very fast ones. Unlike either bonds or the euro, the in- Our last market, crude oil, is generally driven by geopoliti-
sample and out-of-sample results are similar. cal events. Older data was dominated by OPEC, which set
Maybe our choice of two-
thirds data was wrong. Had
we used a larger amount of in-
sample data, perhaps the out-of-
sample would have been better.
The answer could be that price
patterns have changed, or that
they always change, and using
FIGURE 5A: CRUDE OIL. The in-sample older data FIGURE 5B: CRUDE OIL. The out-of-sample test shows either old or new data for the in-
shows broad profits. that more recently, not all trends worked well. sample period will not produce
a winning strategy.
Option 3:
Alternating fixed-
length test periods
One way around this is to use
alternating periods of in-sample
and out-of-sample data, each
FIGURE 6A: US BOND FUTURES. In-sample profit & FIGURE 6B: US BOND FUTERS. Out-of-sample profit long enough to show profits
loss alternating 2-year periods. & loss alternating 2-year periods. using a long-term trend. That
way, we have a sample of both
the price because they were able to provide excess supply. old and new data. We will use two-year intervals. If you
More recently, that’s changed, and the US has become more are testing a fast system, then the intervals can be smaller,
“energy independent” primarily because of natural gas. although that is not necessary.
Although OPEC still establishes quotas for its participating The trick is to track the trend during the entire period
countries, OPEC’s impact is greatly reduced. but only record the daily profits and losses during the in-
Figures 5a and 5b show the in-sample and out-of-sample sample intervals. We then add those returns to get the total
results for crude oil futures. The earlier data was very stable, profits for the test. At the end we also run a test on all the
with slow trends up and down as OPEC adjusted its price. data. If we subtract the alternating results from the results
The exception was in 1986 when Saudi Arabia pushed the using all the data, we get the out-of-sample returns.
price down to bankrupt Iran, but that’s another story! The I am providing some code in EasyLanguage so you
out-of-sample shows much lower returns because a spike can experiment with the alternating intervals approach.
in prices in 2008 topping $140/barrel was a difficult move (See the “S&C Article Code” section of this magazine’s
to capture in a trend system. In addition, this data does website at Traders.com for the code.)
not include 2020 when prices went negative. Choosing
the high profits from the in-sample data (25 days) gave a US bonds
disappointing out-of-sample result. Figures 6a and 6b show the results of using alternating
Reversing the test, using recent data for the in-sample, two-year periods for 30-year bonds, trading both long and
gave predictable results. Adding a few years of the older short. While results are profitable, they are considerably
data to the new test improved profits overall but had the less uniform than a test of continuous data. The best pe-
same pattern of poor returns near the 30-day trend. riods for the in-sample test do not correspond to the best
periods in the out-of-sample tests.
Did the scientific approach work?
In general, older data performed better on a wider range
of trends. Only the S&P showed losses with faster trends If the in-sample and out-of-
using earlier data. But results were far less consistent using sample returns are consistent,
recent data. With the exception of the S&P, choosing the then we are successful. If not,
optimal calculation period from the old data would have the trading system doesn’t work
given disappointing results for the out-of-sample period. or we’ve overfit the data.
That held true whether we used the new or old data for
in-sample testing.
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These differences are not
due to the trend starting and
stopping. The trend calculation
uses all the data, but only the
in-sample returns are posted.
Depending on how the two-year
intervals slice through the data,
they can be identifying periods
of volatility or changing trends. FIGURE 7A: S&P FUTURES. Long-only in-sample FIGURE 7B: S&P FUTURES. Long-only out-of-sample
Given the trending nature of alternating 2-year periods. alternating two-year periods.
bonds, this is disappointing. If
you try to visualize the combined
result of the in-sample and out-
of-sample profits, you should
get very uniform gains across
all calculation periods.
S&P
Using the same alternating two- FIGURE 8A: S&P FUTURES. Total profit, long/short, FIGURE 8B: S&P FUTURES. Total profit, long-only,
year periods applied to the S&P all years. all years.
futures, long-only, we also get a
lack of uniformity. The in-sample test (Figure 7a) looks move together, you are not gaining information by testing
similar to the previous S&P pattern, with losses in the the same data periods.
short term and gains in the long term. The out-of-sample By assigning different test periods to each market, you
(Figure 7b) is very different and more erratic, but combin- can get a more robust solution and better diversification.
ing the two periods gives the familiar pattern that favors I am providing an Excel spreadsheet containing formulas
longer trends. to create these random test periods so you can experiment
Figures 8a and 8b show the difference between the long/ with this yourself. The spreadsheet is provided at Traders.
short results and the long-only results. In Figure 8a, the com in the S&C Article Code section.
long profits don’t offset the short losses until the trend
period is at 120 days. Without the shorts (Figure 8b), the Option 5:
S&P is profitable for all calculation periods, although Walk-forward testing
better as the periods get longer. Most of us are familiar with the concept of walk-forward
Given that bonds are the most trending market and the testing. You select a test interval, in our case, 200 days.
S&P the least trending, these two examples should show You test the moving average calculation periods, 5 to 150
that alternating periods are not as good as I would have days over that data, then pick the best result and use it on
expected. It could be that longer (or shorter) intervals the next, unseen, 20 days of data. You then move forward
might improve results, but two years seemed to be a 20 days and test the past 200 days. You collect the results
reasonable test period, so I will say that these results are of the 20-day out-of-sample periods.
representative. In theory, this sounds fine. It replicates what many
I am providing some code in EasyLanguage so that you analysts would do in real life—continually retest so that
will have a chance to test it yourself. The code is provided the parameters stay relevant. But there are still variables
at Traders.com in the S&C Article Code section. involved: the length of the data to be tested, the number
of days to move forward, and the range of calculation
Option 4: periods. The biggest problem, however, is when you are
Alternating random-length test periods unhappy with the results. If you change anything, such
If the concept of alternating test periods is appealing, as the way you calculate the stop-loss or add a volatility
then consider alternating random-length test periods. One filter, the 20 days that you walked forward are no longer
problem of testing the same data interval for all markets out-of-sample. You are on a path to overfitting.
is that you fit the same events and the out-of-sample sees I programmed a simple moving average walk-forward test
the effects of the same fundamentals. If markets tend to (which is also available at Traders.com in the S&C Article
Code section), and applied it to
the same five markets. I used
the same 200-day test window,
walked forward 20 days (10%
of the test window), and allowed
for moving averages of 10 to 150
days in steps of 10.
Surprisingly, bonds, which
should be the trendiest, did not FIGURE 9A: US BOND FUTURES. Walk-forward out- FIGURE 9B: US BOND FUTURES. Moving average
do as well as expected, but the of-sample profit & loss. selection.
euro did nicely. The S&P and
gold results were awful, jump-
ing from fast to slow trends and
finally breaking even. Crude was
profitable and smooth, but profits
peaked about eight years ago.
Figure 9a shows the cumula-
tive profits of bonds and Figure
9b shows the moving average FIGURE 10A: EURO. Walk-forward out-of-sample FIGURE 10B: EURO. Moving average selection.
selection over the full test period. profit & loss.
The average calculation period
selected was 64 days. of the data as in-sample, we get to use all of it, based on
The euro, Figures 10a and 10b, looks better, with the the belief that more data and more patterns gives a better
average calculation period at 70 days. solution. We do not believe that data can be obsolete—
all data is good even though we may need to adjust for
Now that we’ve seen it all volatility and changing patterns.
Have we reviewed all the options now? Not quite. Our last Looking at the results of the five markets, all of them
option was to test all the data, leaving no out-of-sample. are profitable for all trend speeds. One caveat: there were
Scientists would be horrified! But let’s look at the five no costs, so the fastest trends having the most trades will
results in Figures 11a through 11e. The only market that show smaller gains or even losses once commissions are
will be long-only is the S&P.
While bonds may be more
profitable on the long side, there
can be sustained periods when
rates rise, and we do not want to
be out of the market when that
happens.
Instead of testing 200-day
windows, we test as much as we
want. Instead of using two-thirds FIGURE 11A: US BOND FUTURES. Profit & loss, FIGURE 11B: EURO. Profit & loss, all years.
all years.
FIGURE 11C: S&P FUTURES. Profit & loss, FIGURE 11D: GOLD. Profit & loss, all years. FIGURE 11E: CRUDE OIL. Profit & loss, all
all years. years.
FIGURE 12A: US 30-YEAR TREASURY BONDS. FIGURE 12B: EURO CURRENCY. Three individual FIGURE 12C: EMINI S&P. Three individual profit
Three individual profit streams from the example profit streams from the example moving average- streams from the example moving average-based
moving average-based system using 30-, 50-, based system using 30-, 50-, and 90-day windows, system using 30-, 50-, and 90-day windows,
and 90-day windows, plus the average. plus the average. plus the average.
deducted. On the other hand,

when you see profitable results
over a wide range of calculation
periods, we call this “proof of
concept.” That is, long-term
trends work. Then the next step
is to decide, “Which trend speed
will I use?”
If these markets are profit- FIGURE 12D: GOLD. Three individual profit streams FIGURE 12E: CRUDE OIL. Three individual profit
able over time for most trends, from the example moving average-based system using streams from the example moving average-based
then we can take a different 30-, 50-, and 90-day windows, plus the average. system using 30-, 50-, and 90-day windows, plus
the average.
approach. We know that pick-
ing any one trend will not show
consistent results from year-to-year. When prices move and Methods (with the first edition published in 1978 as
quickly, a faster trend is best, and when there is more noise a seminal book in the field of technical analysis), as well
or slower movement, a longer trend is best. We will not as Kaufman Constructs Trading Systems (2020), and the
know in advance which we should use. newly released book Learn To Trade (2022). For questions
Then the best solution is to use more than one trend, or comments, please go to www.kaufmansignals.com.
preferably three or four. One choice would be 40, 80, and
160 days, or 30, 60, 120 if you want something faster. I The code and spreadsheet mentioned in this article is
would not use anything below 30 days and I would ad- available in the Article Code section of our website,
vance the choices by a constant percent, that is, doubling Traders.com.
the trend period. One choice, which I will show here, is
30-50-90 (rounded to nearest even values). I like to span Further reading
a range going as high as 120 days, but you may not want Kaufman, Perry J. [2022]. Learn To Trade, Amazon.
to go above 90 days. [2020]. Trading Systems and Methods, 6th Edition,
Whichever you choose, the results show that trend- Wiley.
following is robust, and advancing the calculation period [2020]. Kaufman Constructs Trading Systems (print
by a percentage or ratio is a good solution. Figures 12a and ebook editions), Amazon.
through 12e show the three individual profit streams and
the average, using 30-50-90. You might try varying the
calculation periods for different markets to add diversifica-
tion. Put together, these five markets will make an excellent
portfolio. I will leave that for you to do.
Perry J. Kaufman is a trader and financial engineer. He

is the author of many books on trading and market analy-
sis, including the sixth edition (2020) of Trading Systems
FUTURES FOR YOU
INSIDE THE FUTURES WORLD
Want to find out how the futures markets really work? Carley Garner is
the senior strategist for DeCarley Trading, a division of Zaner, where she
also works as a broker. She has written five books on futures and options
trading, with the latest being Trading Commodity Options...With Creativ-
ity (July 2020), as well as A Trader’s First Book On Commodities (third
edition, October 2017) and Higher Probability Commodity Trading (July
2016). Garner also authors widely distributed e-newsletters; for a free
subscription, visit www.DeCarleyTrading.com. To submit a question, email
her at info@carleygarnertrading.com or via www.DeCarleyTrading.com.
Selected questions will appear in a future issue of S&C.
Carley Garner
COMMODITY ETFS process of opening such an account is as futures contracts expired, you
With commodities booming, should relatively simple, it is an extra hoop to likely wouldn’t be down 90% even
I consider commodity ETFs? jump through that many aren’t inter- after transaction costs, slippage, etc.
For full disclosure, I make a living ested in doing. Thus, it is convenient This is not an uncommon phenom-
as a commodity futures and options to reach for the USO rather than a enon and in the defense of this and
broker. Thus, my opinion is biased to- micro crude oil future. other commodity or leveraged ETFs,
ward commodity exposure using the Secondly, speculating in the USO there is an abundance of disclosures
futures market as opposed to ETFs. doesn’t require margin nor does it notifying investors these products
That said, there are some compel- pose risk more than the share pur- are intended for short-term specula-
ling arguments for traders to prefer chase price. However, the downside tions, not buy-and-hold positions.
futures and options on futures over is the investment is in a synthetic Nevertheless, if you are a speculator
ETFs. I should also add, regardless willing to take the risk, why would
of the vehicle chosen, participation in Unlike ETFs, the price you bother accepting administrative
the commodity markets comes with is not influenced and rebalancing risks in addition to
substantial risk and should only be price risk?
done with speculative risk capital.
by rebalancing, On a side note, it is my belief (or
An ETF is an electronically traded administrative fees, opinion) that commodity ETFs are a
fund; most commodity ETFs take and the inefficient detriment to true price discovery in
investor money and pool it for use process of mimicking the futures market. This is because
to purchase futures contracts of a another asset. there is a delay between investments
particular commodity. For instance, in the fund and the employment of
the USO (United States Oil Fund, financial product attempting to mimic funds in the futures market. The
LP) is an exchange-traded stock the price of oil; it is not a direct in- volume of long futures contracts pur-
security that attempts to match the vestment in oil. Due to rebalancing, chased by the funds can significantly
daily changes, in percentage terms, fund administration fees, contango, impact the price of a commodity. This
of the spot price of light sweet crude and overall volatility, the short-term is partly because ETFs tend to attract
oil delivered to Cushing, Oklahoma. performance of such an ETF might bandwagon money that flows in and
They do this, primarily, by purchasing somewhat resemble the underlying out of the market on a whim, which
WTI futures contracts traded on the commodity but in the long run, it can cause commodity rallies and cor-
CME Group’s NYMEX division. does not. rections to dramatically exceed fun-
The two key reasons investors For instance, according to the damentals and logical reasoning. This
flock toward commodity ETFs are USO fund’s website, the cumulative phenomenon also occurs in the stock
convenience and the lack of margin return since inception is a drawdown market, but stock exchange products
and leverage. Most people have ac- of about 89.95%. This was with oil tend to be much deeper markets with
cess to a stock trading account with trading in the $90.00s; so even if thousands of listed securities rather
permission to buy and sell securities, you bought the all-time high in 2008 than the 20 or 30 viable commodity
but few people have access to a fu- near $150 per barrel (without using
tures trading account. Although the leverage) and continued to roll over Continued on page 27
A Study With Risk In Mind
An ETF Portfolio Based On

Minimizing Drawdown
A good risk management plan will deal effectively with Our daily data are purchased from eoddata.com and our
the inevitable drawdowns that will occur. The results research was handled with NinjaTrader 8.
of this study point to a way you can improve an ETF
portfolio and minimize drawdowns. The study
The ETFs listed in Figure 1 were divided into three
by Guy Brys, PhD, and Luc Van Hof groups based on the starting date of the historical data
E
we purchased. Although some have more historical data
xchange traded funds (ETFs) are one of the than shown here, we have restricted this list to three
most important and valuable products created groups for simplicity. The ETFs in each group are not
for individual investors in recent years. ETFs uncorrelated, but we expect they cover and represent the
offer many benefits and, if used wisely, are global economy during the studied time period. As such,
an excellent vehicle to achieve an investor’s we expect those groups to lead to a good performance
investment goals. An ETF is a basket of in a buy-and-hold strategy.
securities that you can buy or sell through a brokerage “Drawdowns” refer to the decline of capital in a trader’s
firm on a stock exchange. They allow investors to short account, or more specifically, the movement from a par-
markets, to gain leverage, and to avoid short-term capital ticular peak to a particular trough. Drawdowns are very
gains taxes. much part of any trading activity, and any risk manage-
In our study, we selected several ETFs which are traded ment plan must detail how to deal with them effectively
TIERNEYMJ/SHUTTERSTOCK
on Euronext Amsterdam and which represent more or so as not to endanger the portfolio. In this article, we
less the global economy. They are all listed in euro, propose a method to minimize this drawdown and, as
which is practical in our calculations. We also do not such, the risk.
include dividends and transaction costs in our research.
TRADING METHODOLOGY
Study of the group of eight ETFs starting from Symbol Description Startdate Exchange
2006 IAEX iShares AEX 2006 AEB
When trading a group of ETFs, a naive approach is IDJG iShares Euro Total Market Growth Large 2006 AEB
to give each ETF an equal part of the assets under IEER iShares MSCI Eastern Europe Capped 2006 AEB
management. As we assume to have €1,000,000 to IEUX iShares MSCI Europe ex-UK 2008 AEB
trade, each ETF in the first group of eight would get IFFF iShares MSCI AC Far East ex-Japan 2006 AEB
€125,000. We consider the buy-and-hold strategy IGSG iShares Dow Jones global sustainability 2015 AEB
in which, each month, the tradesize is recalculated IJPN iShares MSCI Japan 2006 AEB
based on the actual value of the traded instrument. INFR iShares Global Infrastructure 2008 AEB
This leads to the following formula for the tradesize IPRP iShares European Property Yield 2006 AEB
of an ETF: IUSA iShares Core S&P 500 2006 AEB
IWDP iShares Developed Markets Property Yield 2008 AEB
Round(125000/ETF) IUSP iShares US Property Yield 2008 AEB
IWRD iShares MSCI World UCITS 2006 AEB
In the latter part of this article, this approach is
PHAU Wisdomtree Physical Gold 2008 AEB
called the benchmark approach. But, as we initially
VAPX Vanguard FTSE Developed Asia Pacific ex Japan 2015 AEB
are not sure whether all eight ETFs are equally
VEUR Vanguard FTSE Developed Europe 2015 AEB
profitable, we would like the system to give the most
VEVE Vanguard FTSE Developed World 2015 AEB
weight to the better ETFs.
By using the random seed function in the Nin-
VFEM Vanguard FTSE Emerging Markets 2015 AEB
jaTrader platform, our only parameter is the seed

VJPN Vanguard FTSE Japan 2015 AEB
EODDATA.COM
number. We divide the amount of 100 in eight parts
VUSA Vanguard S&P 500 2015 AEB
in a unique manner. We can do this by using the VWRL Vanguard FTSE All-World 2015 AEB
code given in the sidebar, “Code For Reweighting FIGURE 1: ETFS USED FOR THE STUDY. For the study, several ETFs were
selected that are traded on Euronext Amsterdam and which represent more or
ETFs.” less the global economy.
In other words, eight random integer numbers
are drawn from 1 until 100—let’s say mpA to mpH.
Then we sum up these numbers to get the integer CHOSEN
SEED
P&L MDD 3R
value tmp. Thereafter, the values mpA to mpH are Benchmark 0 764K 607K 1,26
reweighted based on tmp such that they sum up to Rs 1–100 7 806K 543K 1,48
100. Finally, this leads to the following formula for Rs 101–200 188 828K 544K 1,52
the tradesize of ETF A: Rs 201–300 248 771K 539K 1,43
Rs 301–400 306 839K 567K 1,48
Round(mpA*1000000/(100*ETF)) Rs 401–500 416 707K 534K 1,32
Rs 501–600 556 747K 529K 1,41
Next, in NinjaTrader, we consider ten optimiza-
Rs 601–700 614 786K 561K 1,40
tions starting from the year 2006 (as mentioned
Rs 701–800 777 878K 547K 1,61
earlier) until June 30, 2020. In each of those ten, the
Rs 801–900 804 862K 552K 1,56
random seed number may vary over 100 values and
Rs 901–1000 931 697K 567K 1,23
the setting with the minimal drawdown is chosen.
FIGURE 2: TESTING. We used NinjaTrader to consider
We compare the results of those optimizations with ten optimizations starting from the year 2006 until June
the benchmark approach. 30, 2020. We see that the P&L has only slightly improved
In the table in Figure 2, we see that the P&L (profit over buy-and-hold and the drawdown has only decreased
& loss) has barely improved and the drawdown has a little.
only decreased a little. The benchmark approach
leads already to a promising result. Our approach
IFFF IJPN IUSA IWRD IAEX IDJG IEER IPRP
has the advantage of being self-learning and more
11 24 17 11 6 11 3 16
robust, as it does not need to make the premise of
FIGURE 3: HIGHEST WEIGHTS. Which of the ETFs got the
equally weighted instruments in advance. Although highest weights and which the lowest? The average weights
this could lead to curve-fitting, we were wondering for the ten optimizations are shown here. The symbols with
which of the ETFs got the highest weights and which the two highest weights are IJPN and IUSA.
CHOSEN
P&L MDD 3R
SEED
Benchmark 0 581K 468K 1,24 We consider the buy-and-hold
Rs 1–100 59 776K 273K 2,84 strategy in which, each month,
Rs 101–200 185 786K 248K 3,17 the tradesize is recalculated
Rs 201–300 298 729K 278K 2,62 based on the actual value of the
Rs 301–400 307 620K 292K 2,12
traded instrument.
Rs 401–500 424 736K 266K 2,77
Rs 501–600 504 692K 221K 3,13
Rs 601–700 617 666K 257K 2,59 got the lowest. On average, the weights shown in the
Rs 701–800 799 797K 239K 3,33 table in Figure 3 were given for the ten optimizations.
Rs 801–900 841 669K 315K 2,12 The symbols with the two highest weights are IJPN and
Rs 901–1000 916 675K 245K 2,76 IUSA.
FIGURE 4: OPTIMIZING ON DATA FROM 2008 TO
2020. Repeating the study on the ETFs for the period Study of the group of five ETFs starting from 2008
from 2008 through June 30, 2020, the approach leads to
In Figure 4, we repeat the same study as above with the
higher P&L, and lower MDD and 3R values compared to
the benchmark, but they nevertheless confirm the strength group of ETFs starting from 2008 until June 30, 2020.
of the buy-and-hold strategy. The optimizations obviously lead to higher P&L, and
lower maximum drawdown (MDD) and 3R values (a
measure of reward-to-risk) compared to the benchmark,
IEUX INFR IWDP IUSP PHAU
but they nevertheless confirm the strength of the buy-
14 25 9 7 46 and-hold strategy.
FIGURE 5: WEIGHTS. The table of The table of the weights, shown in Figure 5, leads to
the weights shows a clear winner in
PHAU, followed by INFR. The other
a clear winner in PHAU, followed by INFR. The other
three symbols do not seem to add three symbols do not seem to add much value to the
much value to the buy-and-hold buy-and-hold strategy.
strategy.
Study of the group of eight ETFs starting from 2015
CHOSEN
With the group of ETFs starting from 2015 until June
SEED
P&L MDD 3R 30, 2020, the differences between the benchmark and
Benchmark 0 305K 223K 1,36 the optimizations are smaller (Figure 6). Like in the
Rs 1–100 93 339K 214K 1,58 first group of ETFs, the table of the weights selects the
Rs 101–200 195 407K 210K 1,94 symbols concerning Japan (VJPN) and the S&P 500
Rs 201–300 268 399K 219K 1,82 (VUSA) (see Figure 7).
Rs 301–400 308 405K 217K 1,87
Rs 401–500 434 387K 211K 1,83
CODE FOR REWEIGHTING ETFS
Random rnd = new Random(Tra_See);
Rs 501–600 560 390K 207K 1,88
mpA = rnd.Next(1,100);
Rs 601–700 611 413K 217K 1,90 mpB = rnd.Next(1,100);
Rs 701–800 720 419K 211K 1,99 mpC = rnd.Next(1,100);
Rs 801–900 846 423K 208K 2,03 mpD = rnd.Next(1,100);
mpE = rnd.Next(1,100);
Rs 901–1000 972 410K 199K 2,06
mpF = rnd.Next(1,100);
FIGURE 6: OPTIMIZING ON DATA SET FROM 2015 TO mpG = rnd.Next(1,100);
2020. Repeating the study on the ETFs for the period from mpH = rnd.Next(1,100);
2015 through June 30, 2020, the differences between the tmp = mpA+mpB+mpC+mpD+mpE+mpF+mpG+mpH+mpI+mpJ;
benchmark and the optimizations are smaller. mpA = Convert.ToInt32(Math.Round(mpA*100*Math.Pow(tmp,-1)));
mpB = Convert.ToInt32(Math.Round(mpB*100*Math.Pow(tmp,-1)));
mpC = Convert.ToInt32(Math.Round(mpC*100*Math.Pow(tmp,-1)));
IGSG VAPX VEUR VEVE VFEM VJPN VUSA VWRL mpD = Convert.ToInt32(Math.Round(mpD*100*Math.Pow(tmp,-1)));
18 4 7 8 5 26 19 14 mpE = Convert.ToInt32(Math.Round(mpE*100*Math.Pow(tmp,-1)));
FIGURE 7: WEIGHTS. Like in the first group of ETFs, the mpF = Convert.ToInt32(Math.Round(mpF*100*Math.Pow(tmp,-1)));
table of the weights selects the symbols concerning Japan mpG = Convert.ToInt32(Math.Round(mpG*100*Math.Pow(tmp,-1)));
(VJPN) and the S&P 500 (VUSA). mpH = Convert.ToInt32(Math.Round(mpH*100*Math.Pow(tmp,-1)));

Study of the four resulting ETFs (IJPN, IUSA, INFR,
PHAU)
Hereby we select four ETFs out of the six from above We would like the system
which we believe offer diversification. See Figure 8. Al- to give the most weight to
though the optimizations from 2008 until June 30, 2020 the better ETFs.
outperform the benchmark approach, the strength of the
strategy remains. Remarkably, the weight of PHAU is a
clear winner and is much higher than the average weight construction, alternative investments, systematic trad-
of 25 (Figure 9). ing and defensive asset allocation.
Conclusion The code given in this article is available in the Article

To conclude, we can state that the benchmark approach Code section of our website, Traders.com.
presented in this article is a good, robust, and easy way to
use a portfolio of ETFs, leading to a return of about 79% Further reading
in twelve years. Optimizing the naive weighting of the Brys, Guy, and Luc Van Hof [2020]. “Studying ETFs
symbols would lead to a greater weight of PHAU and to Online With R,” Technical Analysis of Stocks &
a return of around 90-100% in twelve years and a 3R of Commodities, Volume 38: January.
5. As optimization always entails the risk of curve-fitting, ‡NinjaTrader, ‡eoddata.com
we favor the simple benchmark approach. The out-of- ‡See Editorial Resource Index
sample test from July 1, 2020 until the start of 2022 gives
a return of 22% and an 3R of 9.12 (Figure 10).
Future work CHOSEN

Sometimes it is better not to trade. On the SEED
P&L MDD 3R IJPN IUSA INFR PHAU
other hand, it is possible that a parameter- Benchmark 0 793K 262K 3,02

12 19 14 55
free indicator can help improve results. Rs 1–100 11 791K 204K 3,88 FIGURE 9: FOUR SELECTED
ETFS. Four ETFs out of the
Rs 101–200 104 894K 196K 4,56
six which offer reasonable
Guy Brys received a doctoral degree in Rs 201–300 236 772K 194K 3,98 diversification are selected:
applied statistics at the University of Rs 301–400 353 885K 196K 4,52 IJPN, IUSA, INFR, PHAU.
Antwerp in 2006. Nowadays, he works Rs 401–500 461 927K 187K 4,96 PHAU, with a weight of 55, is
as an independent IT consultant with a Rs 501–600 554 1065K 172K 6,19
a clear winner and is much
higher than the average
focus on financial data. In this regard, Rs 601–700 690 997K 174K 5,72 weight of 25.
he maintains the site https://www.ea- Rs 701–800 793 1107K 179K 6,18
sytrendfollowing.com, together with Luc Rs 801–900 843 1012K 170K 5,95
Van Hof. Rs 901–1000 929 1039K 179K 5,80
Luc Van Hof, in his capacity as CEO FIGURE 8: STUDY OF FOUR RESULTING ETFS. The
of Capital Hedge, advises several funds optimizations from 2008 until June 30, 2020 outperform
and foundations focusing on portfolio the benchmark approach.
NINJATRADER
FIGURE 10: RETURN. The out-of-sample test from July 1, 2020 until the start of 2022 gives a return of 22% and a 3R of 9.12.
Check 1, Check 2, Check 3, Chocks Away!
A Checklist For Successful

Trading
Keeping a checklist can help you keep a handle on your should traders. And the best traders do use them. Trading
trading day as well as your bottom line. Learn how you has its own complexities; complexity usually results in
can boost your trading success and daily productivity human error, which harms performance. To help avoid
with a checklist. Here is one to get you started. errors; use a checklist!
The purpose of a trading checklist is to catch those
By Robert J. Van Eyden, PhD mistakes that arise from momentary inattention or for-
H
getfulness due to trading complexities. Keeping lists can
igh-performance teams consistently deliver in aid in critical trading tasks.
their significant areas, but they are made up of
fallible humans. Like high-performance teams, The need for checklists
trading is a high-performance activity; it is Interestingly, the concept of using a “preflight” checklist
demanding and requires consistency. for aircraft was introduced by engineers and management
So how do high-performance teams and successful at The Boeing Company following the 1935 crash of the
traders consistently deliver high performance? prototype Boeing B-17 (then known as the Model 299) at
PLANE: FIFG/PILOT: FOTOARTIST/SHUTTERSTOCK
For one, they know how to manage distraction. Wright Field in Dayton, Ohio, killing both pilots. An in-
We all get distracted, but how we deal with distraction vestigation found that the pilots had forgotten to disengage
/COLLAGE: CHRISTINE MORRISON
can make a big difference. We have to keep to the “main the crucial gust locks—devices that stop control surfaces
thing.” The “main thing” can be what separates mediocre moving in the wind while parked before takeoff.
performance from high-level performance. Subsequently, checklists were developed that covered
To help keep to the “main thing,” checklists can be the four crucial components of flight, including takeoff,
very useful. Pilots use them, surgeons use them, and so in-flight, landing, and post-landing. All pilots were then
TRADING TECHNIQUES
taught to use the checklist in their formal flight train-

ing. The checklist concept allowed both aviation and
aeronautical engineering to become more and more Checklists can be very
complex. Checklists were developed for more and more useful. Pilots use them,
components of flight, as well as for emergency situations
and more routine situations. As aircraft became more
surgeons use them, and
complicated and pilots could no longer remember all the so should traders.
switches and settings required to achieve safe outcomes,
the checklist became a key ingredient to help ensure that
safety-critical items don’t get forgotten. results are achieved
The same concept continues to be used today in • Helping the checklist user to shift from “observation
flight. Any errors made are analyzed and documented mode” to “awareness mode.”
and procedures are put in place to improve safety and
reduce risk. Keeping track of priorities in trading
I find that this concept can serve as a good model for What is the “main thing” in trading? You could say it is
trading checklists. the preservation of capital.
The concept of the checklist has become a science unto As discussed, the purpose of a checklist is to break
itself. People have spent careers at aircraft manufactur- down a complex set of actions into manageable, bite-size
ers working to develop checklists. Checklists for flight pieces, thus offloading the cognitive effort needed. The
require the correct sequences, the right wording, and checklist should help you to focus on the most press-
the right checks and balances in place, with sometimes ing concerns. It should help you to accomplish what is
more than one person required to answer a checklist item. required without missing critical steps. It will help you
Following a checklist should not be rushed. Checklists stay disciplined. It will help you to ensure the best pos-
should be followed systematically. sible outcome.
Flight crews also follow certain rules to help manage A trading checklist should present the trader with a list
distraction during the busy approach-and-landing phase of of questions that need to be answered before the trader
flight. For this, they use the so-called “20/20 rule.” This opens or exits a trade.
rule states that when they descend below 20,000 feet or Note that a trading plan is not a trading checklist. A
are within 20 minutes of takeoff or landing, all nones- trading plan deals with the big picture, whereas a trad-
sential conversation is stopped, checklists are reviewed, ing checklist ensures you are sticking to the plan or to
standard operating procedures are followed, and radio your rules.
communications with air traffic control are laser-focused. A trading plan should define what needs to be done,
This way, the “main thing” is the “only thing.” including why, when, what, and how. A trading plan should
There are numerous benefits to using checklists. These cover the following (though is not limited to):
are applicable to trading as well. Benefits of using a
checklist include: • My goals and objectives in trading (why)
• The timeframe I am going to trade (when)
• Ensuring that a disciplined approach is followed • Which markets and instruments I will trade
consistently and flawlessly, according to a prede- (what)
termined plan, despite distractions • My money management, method, and mindset
• Completing repetitive tasks quickly and efficiently (how).
with fewer mistakes
• Assessing whether everything is in place to safely In a nutshell, according to an article in this magazine
proceed, where a “no go” decision would prevent by Jody Samuels titled “Top 10 Trading Habits,” a trad-
a possible adverse outcome ing plan is a personalized plan for defining your trading
• Preventing overthinking, thus helping to make a goals, risk tolerance, and individual style. When followed,
process more straightforward it prevents adverse psychological factors from arising in
• Eliminating background “noise” in decision- trading, and it reduces bad trades.
making Committing to your trading plan can be achieved by
• Keeping the focus on what needs to happen following a checklist.
• Bringing order to complexity to help ensure that The trading checklist focuses on each trade at a mi-
them. Why? Not taking a valid trade can negatively
impact overall profitability, since usually, only some
Committing to your trading plan can trades will produce high returns over a series of trades,
be achieved by following a checklist. and you don’t want to miss out on those.
Auxiliary checks. Once you have a valid entry signal,
you can move on to auxiliary checks. Auxiliary checks
cro level. It focuses on the conditions that must be met are not mandatory but advisable. What can auxiliary
before the trade can be placed or closed. That helps to checks help with? Say the scan you ran identified more
ensure that trades aren’t done on an impulse. After all, than one trading opportunity. What to do? Auxiliary
a trading system is only as good as the trader’s ability checks can assist in deconflicting the signals and choos-
to implement it. ing the best opportunity.
Some auxiliary checks might include the following:
The basic trading checklist Is a long bar present (a large volatility move)? Is there
So what would a trading checklist look like? To begin, significant volume, that is, is volume increasing or
we can model it after the style of checklist used by pilots. above average? Is overhead resistance present? Are any
Like the flight checklists used in the pioneering days of divergences present? Is the trade signal with or against
flight, the trading checklist might be divided into four the overall market trend? Is it close to the release of an
phases, covering the lifecycle of the trade: upcoming earnings or economic report?
Initial stop-loss. Before placing the trade, every
1. Before the trade (“preflight”) contingency must be pre-thought-out, given that outlier
 Entry signal Check events can always happen. In trading, being prepared for
 Auxiliary checks Check visually the worst means you will know exactly what the worst is.
 Initial stop-loss Check & set Things never go as planned. Focus on things that can be
 Position sizing Check & set controlled, such as the stop-loss, and keep in mind that
 Targets Set as required most trades will not go perfectly according to plan.
The initial stop-loss or the sell stop must be calculated
2. During the trade (“in-flight”) and set before entering the trade. This will ensure that
 Stop-loss(es)/trailing stops Check & set losses are kept to a minimum, which is a crucial in-
 Discretionary stops Check visually gredient in money management and risk management.
 Averaging up Check & set The initial stop remains fixed or anchored to the initial
entry price for the duration of the trade, ensuring that the
3. Exiting the trade (“landing preparation”) maximum loss is limited to the risk per trade and that
 Stop-loss/take-profit Check & close emotions don’t come into play. With the initial stop set,
triggered the position needs to be monitored and you will close the
 Signal-generated exit Check & close trade with either a stop-loss, a trailing stop or take-profit
stop, or a signal-generated exit.
4. After the exit (“securing the aircraft”) Given that each trade placed has an independent proba-
 Review Note & set bilistic outcome rather than a certain outcome, setting the
initial stop and obeying the stop is part of risk management
These are the four main areas of my trading checklist. and is an essential ingredient for capital preservation.
Next, I’ll take a closer look at each of these major areas. Position sizing. Position sizing will ensure, irrespective
You could add more details, steps, and checks to your of where the initial stop-loss is placed relative to the entry
own checklist from here. level, that the loss will be no more than a percentage of
capital. “How much of my account am I going to risk
Before the trade: prechecks on a single trade?” Two of the most common methods
Before placement of a trade, a minimum of three pre- used to determine this are the fixed-portion method and
checks and two optional checks should be completed, percentage-risk method.
as shown in the above checklist. I’ll elaborate on each
of the five prechecks listed above. • Fixed-portion method—This method is usually
Entry signal. Always remember to only take valid favored by new or developing traders. The meth-
signals and to take all valid signals, not just some of odology is simple: divide the trading capital into
equal amounts then purchase stocks based on these
amounts. The trader never loses more than a fixed
amount on a trade. We all get distracted, but
• Percentage risk method—This method is favored by
how we deal with distraction
professional traders. Simply put, how much a trader
is prepared to lose as a percentage of trading capital can make a difference.
is usually set between 0.5% to about 2%. Anything
beyond 2% is viewed as aggressive.
en stop-losses, trailing stops, percentage stops, volatility
Targets. A target or a profit target is a predetermined stops, time stops, and panic stops.
price level where the trade will be closed. Profit targets A breakeven stop-loss is placed at the price where
are best-case scenarios and calculated before placing the the position would break even from a cost perspective.
position. Typically, profit targets are calculated by: Opinions differ on their usefulness. If a breakeven stop
is reached, should it be immediately actioned? It can be
• A dollar value or percentage-based move from the tempting to move the stop-loss to the breakeven point.
initial entry price This would eliminate risk but also limits potential future
• A risk-to-reward ratio or an R multiple, for ex- profits. Given that this stop-loss is based on an additive
ample, 1:2 numerical value or a level, it could potentially not make
• A Fibonacci extension (such as 1.618, 2.618 and sense or be meaningful from a risk-to-reward perspec-
4.236). Fibonacci extensions are usually drawn tive, given that the risk-to-reward ratio evolves as the
from the initial stop-loss level to the high of the trade progresses.
initial entry bar or the low-to-high initial entry bar A trailing stop is set at a level that has a low prob-
(traditional method). But they can also be drawn ability of being triggered. A trailing stop can be set as
from the initial stop-loss level to the entry price of a percentage fall (that is, when price drops by a given
the initial entry bar. percent), or it could be tied to volatility, tied to a given
technical indicator (such as a moving average crossover,
A common-sense approach, recommended by many a parabolic indicator, etc.), or tied to a pattern (such as
successful traders, is: if the price is close to 80% of the support & resistance).
target, close the position. A time stop ensures that trading profits do not go stale,
thus unlocking trading capital for other opportunities.
Monitoring the open position You could consider as a guideline that if a trade is not
(“in-flight”) in-the-money or only has a slight profit after 20 days (a
The next set of checks occur once the trade gets filled. trading month) consider closing the position.
During this phase, the checks include stop-loss manage- A time-out stop dictates that the trader will take a break
ment and whether to add to a winning position. from trading in given situations, such as after a losing
Stop-losses. Managing the risk of an open position streak, after a drawdown is triggered, or when the trader
consists of stop-loss discipline, which should always be wants to step back and review and recharge.
active. Stop-losses are risk management tools and should A panic stop addresses possible “black swan” events
be viewed as a mechanism to limit losses; however, or market abnormalities. If such an event occurs, which
they also protect profits (such as trailing stops). While could cause significant discomfort to the trader, a posi-
trailing stops are profit-building tools, stop-losses are tion may be closed or partially closed.
risk-management tools. Bonus stops may cover the scenario where rampant
A stop-loss is a predefined price level. If price moves speculation is occurring. Explosive moves in price could
against the trader’s expectation, the position should be result. In this type of scenario, stop-losses could be
immediately closed, ensuring that a statistically signifi- tightened or the position size could be reduced.
cant unrealized profit does not turn into a statistically These last three types of stops are discretionary.
significant realized loss. As already discussed, the most Discretionary stop-losses are usually triggered before a
critical stop is the initial stop. Once the trade has been nondiscretionary stop-loss is triggered.
filled, a stop-loss needs to be placed, preferably identi- Averaging up. This is also referred to as scaling up
fied beforehand. or pyramiding. It’s about adding to your current posi-
The various types of stop-losses could include breakev- tion. You need a valid reason to average up. You don’t
and improve your decision-making processes. A trader
who meticulously does a post-trade review has a growth
A trading system is only as mindset, which assures that today’s trading effort will
good as the trader’s ability be better than yesterday’s trading effort.
to implement it. A useful post-trade review doesn’t need to be overly
detailed or time-consuming. Taking the time to review
each closed trade by using a rating system or by taking
add to a position simply because a trade is in profitable notes can significantly improve a trader’s journey. Let-
territory. How do you know when to average up? There ting go of old ideas and cultivating perseverance and
are no hard-and-fast rules; numerous methods and resilience are required for the long game of trading. It
techniques exist. However, by averaging up, additional also provides good insight into what works and what
costs will be incurred per total trade position, and this needs to be improved. Also, when a good trade is made,
needs to be weighed against the desired risk-to-return celebrate!
profile for the trade. Keep in mind that a winning (profitable) trade can be a
good trade, but a good trade is not always a winning trade.
Getting ready to exit A good trade is a trade that adhered to the trading plan.
(“landing preparation”) Beginning traders often view each trade as a “winner” or
Has your stop-loss or take-profit level been triggered? “loser,” instead of whether the trade was a “good” trade
Or have you received an exit signal generated by your or a “bad” trade. This mindset shift is required because
trading strategy or indicator? It may be time to look trading is a process, not just a simple outcome.
toward the exit. Successful traders understand that the quality of a de-
Exits are more important than entries. The exits decision is not the outcome. If your process (trading plan)
termine the shape of the profit and loss distribution over is strictly followed, then the outcome, over time, will be
a series of trades. The exit also determines the success a positive-sloping equity curve, if your trading strategy
or failure of an individual trade. A good exit makes a has an edge, that is.
good trade. A trader has more control over the entry Viewing your trades in terms of how well your deci-
than the exit. sions adhered to your process and trading plan helps you
What gives you positive expectancy is ensuring that to deemphasize singular outcomes, mitigating outcome
your average losses are less than your average wins over biases and survivorship biases.
a series of trades. A bad entry can be salvaged, but a Post-trade reviews help you to retain information for
bad exit can’t. future trades, and they allow you to evaluate your own
A stop-loss or take-profit level is reached. The stop- performance for personal and professional growth. Re-
loss or target price is determined and set when a trade views also give you the opportunity to rate your trades.
signal is identified and acted upon. A target is static. Review your trade setup, the entry, and the exit. How
An exit signal is generated. Exit signals are usually did they stack up?
generated by indicators or oscillators. Signals occur as a After each closed trade, the review process repeats.
result of specific criteria being met. Unlike price targets, Identify what works. Eliminate the noise. Do this for
exit signals cannot be predicted. They are dynamic and every closed trade.
not known in advance. It all comes down to preservation of capital, and for
that, we need to manage ourselves and manage risk.
After the close (“securing the Toward that end, here are some final points you can add
aircraft”): trade review to your trading checklist:
In commercial aviation and in the military, debriefing
is part of standard operating procedures. The goal is to • Before placement of the trade, did you take all the
identify what went well and what didn’t. The “debrief,” necessary steps?
or the review, is the final check for the trader and is a • Did the position size per trade work well?
necessary step. Why is it important? Because learning • Did you continue to monitor your position during
leads to winning. its life cycle?
To improve as a trader, you should review and journal • If any mistakes were made, were they accounted
(or track) your trades. This will help you to look for for?
weaknesses in your trading behavior, discover new things, • Did you methodically follow the checklist?
Conclusion Further reading
Human emotions can get in the way of successful trad- Ludders, John W., and Matthew McMillan [2017]. Er-
ing because the markets can be very unpredictable and rors In Veterinary Anaesthesia—A Brief History Of
irrational. Checklists link the want to do with the need Checklists, appendix E, John Wiley & Sons.
to do. Every trader wants to achieve an upward-sloping MacPhail, Alex [2020]. https://www.alexmacphail.co.za/
equity curve. A good checklist can help you ensure post/managing-distraction
consistent and flawless execution of your trading plan. Samuel, Jody [2008]. “Top 10 Trading Habits,” Techni-
Done repeatedly, this can help you achieve a positive, cal Analysis of Stocks & Commodities, Volume
upward-sloping equity curve over time, thus helping you 26: October.
to stay in the game. Van Eyden, Robert J. [2020]. “The Chase Of Volatil-
ity,” Technical Analysis of Stocks & Commodities,
Robert J. Van Eyden, PhD, is the CEO of a stockbroking Volume 38: July.
and portfolio management business. He is the author Brandt, Peter [2019]. https://twitter.com/PeterLBrandt/
of The Money Fountain (2013) and Investing Happiness status/1098560028364042241
(2020). He may be reached at robert@unbeatabletrader. Tharp, Van K. [2015]. https://www.youtube.com/
com. watch?v=JFuF6M7z1jg
The author wishes to acknowledge Alex MacPhail’s Vervoort, Sylvain [2009]. “Average True Range Trail-
input, senior airline pilot and former Air Force aerobat- ing Stops,” part 2, Technical Analysis of Stocks &
ics pilot and instructor. Commodities, Volume 27: June.
FUTURES FOR YOU

GARNER been possible without the volume manner with a futures contract of
Continued from page 17 infusions resulting from bandwagon various sizes (E-Micro, E-Mini, or
USO trades and the immediate mass the traditional 100-barrel contract).
exodus from the fund. Of course, Other benefits of futures trading
futures contracts. In other words, the futures speculators have been known relative to ETFs are the ability to
impact and consequences of overzeal- to cause wild price swings without make transactions in liquid markets
ous momentum trading doesn’t come any outside help, but probably not to 23-hours per day and easier tax
with the same societal burden it does this extreme. Perhaps the commodity reporting, and a lower overall rate
in commodities. markets are deep enough to absorb for those who trade profitably. The
For example, in March of 2022, the money flow that comes with an drawback to futures trading is the
the Russian invasion of Ukraine ETF showing up on the heat maps contracts provide traders access to
triggered a break above $100.00 per of hundreds of millions of mobile leverage that can create opportuni-
barrel in crude oil futures in over- trading app users looking for a place ties for large gains and losses in a
night trading followed by a quick $10 to play in the markets. short amount of time for those that
plunge back to $90,00. However, in Futures and options on futures, choose to utilize the leverage (traders
the following days, massive inflows on the other hand, offer high-risk can reduce or eliminate leverage by
into the USO ETF in addition to a speculators a venue for extremely funding an account with more than
relentless stream of bullish news efficient speculation. Because futures the minimum margin requirement).
immediately forced prices to $135.00 contracts are written against the de- Further, commodities in general
per barrel with very little time spent livery of an underlying commodity, are a very unforgiving asset class.
traveling to the highest price for oil it is as close to trading the physical They don’t pay dividends or coupon
since 2008 and only the second time commodity as you can get. Unlike payments and they generally trade
in history oil had traded at such a ETFs, the price is not influenced by sideways, not in an upward trajectory
lofty level. A few short days later, rebalancing, administrative fees, and like equities tend to do.
the price of oil had collapsed into the inefficient process of mimicking
the low $90.00s. This unprecedented another asset. If you want to be long
volatility probably wouldn’t have oil, you can do so in an unabated
TRADING ON MOMENTUM
Scanning For Stocks To Swing Trade
Swing Trading Uptrends

With Wide Candles
Finding the best stocks and ETFs to High ratio of buying Step 1: Find a stock that has been
swing trade can be quite challeng- days versus selling or trending up and has at least 5 wide-
ing. In this month’s column, you’ll consolidation range (>$1) candles in a 4-week
learn how to use a simple wide- When you see many large green timeframe.
candle approach to help you visu- candles in an uptrending chart, it in-
ally scan for strong breakouts. dicates a high degree of buying price Step 2: Place a long entry at $0.50
action that should be traded, for as above the prior day’s high.
by Ken Calhoun long as the trend continues. It relates
T
to the concept of signal to noise. A Step 3: Once the order is filled,
he criteria for the wide-candle sequence of wide range green candles place a stop at the prior day’s low
approach is easy to under- gives you a clear buying signal. The price.
stand. Look for charts similar fact that many days had at least a $1
to the chart in Figure 1 of range green candle is significant. Step 4: Trail a cover stop at no
Tuttle Capital Short Innovation ETF more than $2 to lock in profits on
(SARK), in which there are many Step-by-step action plan winning entries.
green candles of at least $1 range Here’s how you can start using this
(wide candles) in a steady uptrend. strategy: Continued on page 56
eSIGNAL
FIGURE 1: UPTRENDING WIDE CANDLE TREND PATTERN. Strong uptrend has many green candles.
MARKET RAP
THE WORLD OF RETAIL TRADING
Emilio Tomasini is an adjunct professor of corporate finance at the
University of Bologna in Italy and is a professional trader. He has au-
dited over 5,000 accounts of traders during 13 years of a real-money
trading competition, giving him unique insights into what helps a retail
trader to succeed. He has expertise in technical analysis and trading
Emilio Tomasini
system design. In this column, he shares his sometimes “unserious”
thoughts on serious topics in finance. In his writings, he hopes to help the retail trader better understand the leap
from unprofitable to profitable trader, firmly believing that the right answers can come only if the right questions
are asked. At his website at www.emiliotomasini.com, he offers some of his expertise in a free video course.
GAINING A VITAL EDGE IN STOCK limits of using fundamental analysis by institutional buying and selling, not
SELECTION USING FUNDAMENTAL on stocks; after all, the true value of by moving averages or indicators. If
ANALYSIS a company is known only by the dei- you could enter the institutions’ minds,
Are you ever skeptical about using ties. But price, on the other hand, is that would be like knowing in advance
fundamental analysis to evaluate a revealed every day by traders in the when the enemy will strike in a war. So
company or stock? Don’t worry, “the global markets. I try to study what they have studied
market can be more wrong than you.” My experience agrees with Damo- and learn their school of thought. What
That quote is from Aswath Damoraran, daran’s: it is better to be on the safe have they been taught to do? How do
professor of corporate finance at the side of the trade and know what the they approach their analysis? What
University of New York Stern School best estimate of value is for all the are their matras?
of Business, and an expert in funda- stocks you are investing your money Stock valuations can best be gauged
mental analysis. Yet he is not strictly in. There is not just one single truth, but using a complicated spreadsheet.
a fundamental analyst; he keeps an rather, there are many ever-changing Unfortunately, it’s not easy for a
open mind. truths, and being aware of all of them retail investor to evaluate the fair
Yes, in past decades, the two ap- price of a stock when armed with a
proaches—fundamental analysis and What a retail trader complicated spreadsheet. The task is
technical analysis—had a gulf between very time-consuming and requires ex-
should know are the
them that analysts didn’t seem to cross. tensive education to accomplish well.
I think the two approaches started to dynamics of institutional However, what a retail trader should
merge when professional fundamental buying, which are driven know is quite simply the dynamics of
databases started to become available mostly by fundamentals. institutional buying, which are driven
cheaply, especially to retail investors. mostly by fundamental reasons. This
For the first time in history, funda- can help you to make better decisions is the real reason that things like bal-
mental analysts had to face the same when it comes to the markets. And this ance sheets, the discounted cash flows
problem that “classical” technical is what makes fundamental analysis of method, and studying multiples can
analysis did—that is, when computers stocks exciting but also a real challenge give insight to technical traders when
started to scrutinize the effective- for the analyst. buying a stock.
ness of techniques, that up till then, I would add one more point regard- Remember, it’s better to swing your
had never been scientifically tested. ing the importance of fundamental fishing rod among the big fishes, so
Personal computers canceled some of analysis in stock trading. As I am a that you know that you are in good
the strict dogma in both fields, show- practitioner of both technical analysis company. So even if you are a sea-
ing that beating the markets is really and fundamental analysis, my belief soned technical trader, don’t hesitate to
a cyclopic endeavor, and intellectual is that neither is perfect. Fundamental engage with the many ugly-sounding
blindness surely doesn’t help. analysis in stock trading helps you acronyms of fundamental analysis
Today, no one would be surprised most in the selection phase when you such as EX, EV/EBITDA, ROIC, DCF,
if you practice both disciplines at are comparing companies. If I can the Piotrosky score, and so on, because
the same time. Indeed, it seems that have an understanding of what the being familiar with them can help you
following both disciplines simultane- institutional investors are looking for in understanding what the big fishes
ously starts to become a positive edge. in stock selection, then as a retail trader, are doing and why.
Damodaran knows very well the real I will be better off. Stocks are moved
INTERVIEW
Finding Returns In Both Bull And Bear Markets
A Conversation With
Jon Wolfenbarger
Jon Wolfenbarger, CFA, has over 25 years of professional investment
experience, including over two decades as a securities analyst at Allianz
Global Investors. Prior to Allianz, he was an investment banker at Mer-
rill Lynch and JP Morgan. In addition to his professional experience,
Wolfenbarger spent over three decades studying investing and economics
to develop his Bull And Bear Profits approach to investing. This approach
is based on technical, fundamental, economic, and long-term returns
analysis, as well as an understanding of the underlying economic and
psychological causes of business cycles and bull and bear markets.
In 2021, Wolfenbarger launched BullAndBearProfits.com to help in-
dividual investors grow wealth and learn how to profit in both bull and
bear markets with stocks & ETFs. His website offers educational articles,
special reports, narrated webinars, interviews, a beginner’s investing
course, interactive Q&A features, and a recommended reading list. His
Bull And Bear Profits newsletter service provides up to 10 actionable
stock & ETF recommendations each month and timely market insights.
Wolfenbarger leverages his long-term experience in service to individual
investors, rather than continuing in a traditional Wall Street role. That’s why I’m so
Stocks & Commodities Contributing Writer Karl Montevirgen spoke passionate about helping
with Jon Wolfenbarger on February 2, 2022 to find out more about his individuals effectively
general approach to investing, and how he determines the buy and sell identify bull and bear
recommendations given in his newsletter.
markets and invest
Jon, could you intro- help investors profit in both direc- accordingly. That’s the
duce yourself? tions. My team and I work to solve best way to dramatically
I have over 25 years of that big, sometimes wealth-killing, outperform traditional
investment industry expe- problem for investors by helping investing approaches year
rience, including 22 years them profit either way. after year.
as a stock analyst at Allianz Global
Investors in San Francisco. When I left You have a CFA designation,
Allianz in 2019, I had the best one-year, correct? I know it’s a difficult the three-year CFA program. But
three-year and five-year stock perfor- program. because I had already been through
mance of all analysts there. Then I Yes, I do. Before earning the all those years of intensive study,
founded BullAndBearProfits.com to Chartered Financial Analyst (CFA) the CFA program actually felt pretty
bring my market insights directly to designation, I attended the Univer- easy for me.
individual investors. sity of Texas at Austin and I was in So I have a strong educational
Most investors are overwhelmingly the honors business program there, background in finance, accounting,
dependent on only bull markets. They which was a fairly select program; I economics, and fundamentals. After
desperately need markets to rise for- focused on finance, accounting and college, I was an investment bank-
JACKIE NIAM/SHUTTERSTOCK
ever. But markets have never cooper- economics at UT. Then I earned an ing analyst for three years, focusing
ated with a one-way direction. Instead, MBA at Duke, where I again focused mostly on mergers & acquisitions.
they rise and fall, over and over again. on finance, accounting, and econom- I built extensive cash flow models
There are simple tools available to ics. After getting my MBA, I began for individual companies. I learned
how to analyze companies’ financials tive positioning.
and how to value companies. After With technical analysis,
Duke, I joined Allianz Global Inves- I focus on absolute and rel- I started incorporating
tors in 1997. For the first 10 years or ative bull and bear market bigger-picture tools such
so, I was almost entirely focused on price trends. I also monitor as technical indicators and
fundamentals—analyzing revenue nearly 30 stock market in- economic indicators into my
and earnings growth, qualitative dicators to assess investor
fundamentals of management, com- sentiment and the health of
daily work as an analyst.
petition in the industry, etc.—very the overall market.
fundamental-oriented analysis. I got I came to use technical
very good at it, but the 2008–2009 analysis without having formally average can be incredibly useful in
global financial crisis taught me that studied it. I had always been taught identifying trends in the market,
I needed to learn more about bull and that technical analysis was hocus- both bull and bear market trends.
bear market cycles. pocus and didn’t work and was useless That really stimulated my interest
and there’s no way that using past in technical analysis, and after that,
While many people use either a price data could help you with the I read more books on it.
purely fundamental or purely tech- future. So I didn’t really study it or So yes, I apply both technical and
nical approach, you use both. look at it early on. But then, in the fundamental information. I’m not a
Yes, I like to start with a long-term early-2000s, the tech bust happened, pure technician or a pure fundamen-
“big picture” top-down view and then which was quite dramatic at the time. tal analyst. Over many years, I’ve
narrow in on the shorter-term outlook Then we had the 2008–2009 Great refined an optimized blend of both
for individual stocks and ETFs with Recession. I realized that for my own disciplines, which has proven itself
the best fundamental and technical personal investing needs, I needed to key to successfully navigating bull
characteristics. figure out bear markets, since bull and bear markets.
For fundamentals of major asset markets are easy! By luck, I actually
classes, I look at proven valuation sat out most of those bear markets In addition to fundamental and
indicators for estimating long-term simply because I had sold my stocks technical indicators, you also use
returns. For stocks, I use total stock for other reasons and was looking economic indicators.
market capitalization relative to to get back in the market, but stocks Yes, I also had decided around
GDP, as well as dividend yields. For kept falling, so I just kept waiting, that time that I wanted to get a bet-
commodities, I look at prices relative and I ended up waiting it out. But ter handle on the overall economy. I
to GDP. Bonds are easy to estimate I realized I needed to learn how to realized that I needed to zoom out
long-term returns for, as you just have formally identify bear markets and from my narrow focus on individual
to look at interest rates. how to profit from them, instead of companies and look at the bigger pic-
Unfortunately, stocks are the most just waiting them out. I needed to ture, including the overall market and
expensive they have ever been right study bull and bear market cycles. the economy. I’ve always been fas-
now, so annual returns over the next Around mid-2008, about halfway cinated by economics and economic
decade could very well be negative. through that bear market, I happened theory, but I hadn’t really been using
Bonds offer low nominal returns and to read an article that said that if you economic indicators in my work to
negative real returns. Commodities had read a particular book that it help get an idea of where the economy
appear to be the most attractively referenced, you would have known is headed. So I started looking into
valued assets for delivering attrac- when that bear market had started. leading economic indicators—money
tive long-term returns, which can The book was Stan Weinstein’s supply, the yield curve, and leading
be invested in with a wide variety Secrets For Profiting In Bull And economic indexes developed by the
of ETFs. Bear Markets, which was written in Organisation for Economic Coopera-
For assessing economic trends, I the 1980s. I read the book and was tion and Development (OECD), the
monitor 45 leading and coincident fascinated by it. In the book, Wein- Economic Cycle Research Institute
economic indicators. For individual stein explained technical analysis in a (ECRI), and other professional or-
stocks, which I analyzed for more simple, down-to-earth way. He didn’t ganizations that had created leading
than 22 years, I focus on strong make it too complicated. He showed indexes for the economy that have
growth, profitability, and competi- how simple indicators like a moving stood the test of time over decades.
air by central banks and traders should be watching?
commercial banks, that There are several other leading eco-
There are also stocks money is then loaned out to nomic indicators that traders should
and ETFs that are businesses, and businesses follow. The OECD publishes leading
appropriate for bear market take that money and start indicators for most major economies
environments. There are new projects, building new around the world every month on their
factories and so on. But website. ECRI is another provider of
always places to make
they’re misled by this new leading indicators. At their website,
money in a bear market. money, which appears to they often provide their views on the
them the same way as if outlook of the economy.
money had been saved by Also, global PMIs and US PMIs
I started incorporating these consumers, which would have freed (purchasing managers’ indexes) pro-
bigger-picture tools, both techni- up scarce resources for investment. vide a close read on the economy. One
cal and economic indicators, in my But when the money is created out of of the best economic indicators that
daily work as an analyst. Doing that thin air, no scarce resources have been correlates with the stock market is
helped me to focus on the sectors that freed up for businesses to purchase. initial unemployment claims. Those
were performing better technically, So eventually, businesses realize are released every week, so they’re
which helped me to focus on what there’s not enough physical resources very frequent and widely reported.
was benefitting by the prevailing eco- in the economy—labor, raw materi- When initial unemployment claims
nomic trends. That’s when I started als, capital goods, etc.—for them to start going up meaningfully, that
fusing the big-picture technical and complete their projects. That forces tends to coincide with the start of a
economic indicators with my indi- them to scramble for resources and recession and a bear market.
vidual stock analysis. As a result, my working capital to complete their Traders can also watch short-term
performance improved dramatically. projects, which leads to higher prices interest rates, such as the 2-year
It helped to make the second decade and interest rates. Then, money sup- Treasury rate. The Fed tends to fol-
of my career as an analyst much bet- ply growth slows, which leads to a low the 2-year Treasury rate in terms
ter than my first decade. I became a bust with declining production and of what they do with their federal
more sophisticated investor when I employment, as businesses realize funds rate. Thus, when you see ris-
was able to use the full complement there’s not enough money and re- ing short-term interest rates, like the
of tools available. sources to fund their projects. 2-year Treasury rate, that is generally
So the key is to understand that the a dangerous sign for stocks and the
How can economic indicators be business cycle is created by money economy. And 2-year Treasury rates
used by traders? supply growth accelerating. That fuels have risen lately. In the last couple
For short-term traders, the tech- the boom. Then money supply growth of months, they’ve doubled to over
nicals are by far the most important slows, which causes the bust. So money 1%, and that’s why I think the Fed is
thing. But there are several economic supply growth is a very important in- being forced by the market to raise
indicators that even short- term trad- dicator that all investors should focus interest rates.
ers can look at and it doesn’t take a on. You can also look at the yield curve, You can also look at high-yield
lot of time to monitor them. the 10-year less the 2-year interest bond prices relative to their 250-day
As for economic theory, the most rate, or the 10-year less the 3-month moving average. High-yield markets
important concept investors should interest rate. The yield curve tends to are very sensitive to the economy.
understand—beyond supply and invert before a recession, which usu- You can also look at the perfor-
demand—is Austrian Business Cycle ally coincides with a bear market. You mance of the cyclical industrial sector
Theory. This was first developed a can find these indicators on the FRED versus the more defensive consumer
century ago by Ludwig von Mises, database (fred.stlouisfed.org), and I staples sector. That’s been bearish
a brilliant Austrian economist. His update and analyze them regularly lately. In a strong economy, indus-
student, F.A. Hayek, won the Nobel on BullAndBearProfits.com. trial stocks should be outpacing the
Prize in 1974 for his work on Aus- performance of consumer staples. In
trian Business Cycle Theory. This So you keep an eye on money sup- a recession, consumer staples will
business cycle theory explained that ply, business cycles, and interest dramatically outperform industrials.
when money is created out of thin rate yield curves. Any others that So that’s an easy thing that techni-
cians can look at, just to get a read on good resource to monitor
what’s going on in the economy. once a month.
So there are a lot of things techni- Another useful and I have four rules to
cians can look at that are pretty easy free monthly report is the help identify bull and
to understand and easy to use. “Global PMI,” published bear markets.
by J.P. Morgan, which is
These days, all eyes are certainly a global purchasing man-
on interest rates and changes in the agers’ index for manufac-
fed funds rate. turing. If the PMI is above 50, that trading above their 200-day moving
Yes, and the Fed doesn’t really signals economic expansion from the averages. In early 2021, nearly 90% of
want to raise rates. They’d rather previous month. If it’s below 50, that New York Stock Exchange (NYSE)
never raise rates. But they have to signals contraction from the previous stocks were trading above their 200-
respond to the market. They can’t let month. Global PMIs track global day moving averages. That showed
Treasury yields get way above what GDP growth very well, usually with a very strong and broad bull market
banks are lending each other, or else a slight lead. So that’s a good place to trend. And now that number has
there could be problems within the get an idea if things are getting bet- declined to only 41%. So that means
banking system. The Fed has to react ter or worse on the production side, over half—59%—of New York Stock
to the market. which is important since production Exchange stocks are below their 200-
The 2-year interest rate can help drives economic growth. day moving average. They’re techni-
you to get an idea of what the Fed’s So those are the two main indica- cally in a bear market downtrend. So
going to do, without having to read tors I would look at to get a global that is not a healthy market.
all of their comments. That’s why I economic perspective. Usually, when the percentage falls
typically say that, as a technician, below 30%, that’s a sign that you’re
just looking at the 2-year Treasury What are some signs of weakness essentially in a bear market. It got
yield over time is helpful because in the stock market? What do you down to just over 30% a week or so
it almost always leads what the Fed follow to gauge technical strength ago, and it’s bounced back to 41%,
does on interest rates. Over the past and weakness in the markets? but still, that’s not a healthy trend
few months, the 2-year has been rising When you have a healthy bull we’re seeing right now. So that is one
significantly due to high inflation. market in stocks, investors tend to important indicator I look at.
be indiscriminate in their bullish- And similar to that is the bull-
Getting a bigger picture is important ness. In a strong bull market, most ish percent index, which shows the
for evaluating the overall health of securities tend to be in an uptrend. percentage of stocks that are bullish
the economy and the stock market. When investors turn bearish, the on point-and-figure charts. And then
What can technical traders use to major indexes such as the S&P 500 I also like to look at the advance/
monitor what’s happening in the and the Dow Jones Industrials can decline volume line. In recent weeks,
global economy? still appear strong due to the per- that has fallen below its 250-day
For a global focus, if I could nar- formance of a few large stocks, but moving average, which is very con-
row it down to two indicators, one you can start seeing cracks beneath cerning.
would be the leading indicators that the surface of the headline indexes. I also look at new highs minus new
are published by OECD, which I That’s why it’s very important to lows. I look at high-yield bond prices
mentioned earlier. They publish a look at stock market breadth to get relative to their 250-day moving aver-
free report every month. It provides a a picture of the overall health of the age. I look at Dow theory—whether
quick snapshot of whether the global stock market. the Dow Jones industrials and trans-
economy is slowing or accelerating. For stocks, there are a large portation average are in sync or not.
The report shows a simple chart of number of indicators you can look And then, as I mentioned, I look at
how the leading indicators are far- at—too many, really. With bonds or the industrial stocks relative to con-
ing versus historical trends. And commodities, there are not as many sumer staple stocks, and see if that’s
they show charts for all of the major indicators available to look at. To in a strong uptrend or not.
OECD countries, including the US, gauge the health of the stock market, Those are some of the 18 indicators
China, individual countries in Eu- I monitor 18 indicators. One of the I look at. Those are often leading
rope, and so on. So I think that’s a key ones is the percentage of stocks indicators for the headline indexes.
It’s a tool to help time the and rallied and rallied. So that’s why
market, to see when ev- technical analysis is so important to
I use the 250-day instead of erybody’s either panick- focus on.
the more popular 200-day ing or feeling irrational
MA because it tends to have exuberance. Can you tell us about your process
fewer head fakes, fewer Yes, exactly. for coming up with the buy and
false messages. sell recommendations given in
What things can traders your newsletter, “Bull And Bear
and investors do to take Profits”?
It emphasizes the importance of try- advantage of the headlines? Yes. Each month, we hand-select
ing to see if there are cracks just be- There’s an old saying by techni- 4 to 10 new stock and ETF ideas for
neath the headlines or beneath what cians that “it’s not the news that our members. While those are free
looks like strong performance. matters, it’s how the market reacts to anyone interested right now, those
Exactly. For instance, the NAS- to the news.” And I really do think actionable trade recommendations
DAQ sold off a lot in January 2022. that’s true. If there is some bad news will become the central feature of a
But the percentage of NASDAQ but stocks are shrugging it off or are traditional newsletter service we will
stocks that were above their 200-day even rallying, that is a very bullish start selling later this year. For now,
moving average had already fallen sign. If stocks are selling off on good it’s all free at BullAndBearProfits.
below 30% in late November. And news, as they often do during bear com.
now it’s at 21%. So almost 80% of markets, then that’s a bearish sign. My process is a little different
NASDAQ stocks are below their It’s helpful to know what the news for individual stock recommenda-
200-day moving average. That is, and then you can look and see tions than for ETFs. For individual
indicator gave us a major warning how stocks are reacting. That gives stocks, I run a screen on over 8,000
back in November that the NAS- you an idea of the bullish or bearish US stocks.
DAQ was vulnerable coming into tone of the market. I perform a fundamental screen
the new year. But often, an initial reaction to news first, looking for strong sales and
is pure noise. For example, when the earnings growth, strong margin
Is the reverse generally true dur- Fed has a meeting, the first hour or so improvement, return on equity im-
ing a bear market, where seeing of trading after a Fed announcement provement, and other factors. I’m
more than 50% of the stocks trad- is often just noise. It’s best not to get looking for good, solid financial
ing above their 200-day moving too caught up in the initial reaction. fundamentals. This initial funda-
average would signal the potential The initial reaction during the first mental screen is to make sure I’m
for the beginning of another bull few hours or even the first day often only recommending companies that
trend? means nothing. In fact, it can be a are doing well.
Yes, when the percentage of stocks contrarian indicator. So I try to ignore And then, once I get a list of stocks
trading above their 200-day moving the knee-jerk reactions that can hap- returned from that screen—and there
average rises over 70%, that indicates pen at first. I focus more on what the are usually around 100 or 200 stocks
a clear bull market uptrend, while market is doing the next day or the that pass my fundamental screen—
a clear bear market downtrend is next couple of days. then I run those through a technical
indicated when that percentage falls Here’s an example of how the mar- screen. The technical criteria I use
below 30%. ket can react to news. We know how are pretty simple. I’m essentially
For example, the percentage of the COVID pandemic hit in February looking for a strong absolute uptrend
NYSE stocks trading above their 2020. After that, we had a 35% stock and a strong uptrend relative to the
200-day moving average rose from market crash. But since then, the S&P 500.
only 2% in October 2008 to over market is 40% higher than it was in For the absolute uptrend, I want to
30% by April 2009, over 70% by early 2020, despite all the tragedies of see the 20-day moving average and
June 2009 and over 90% by August COVID, despite a global depression the 60-day moving average above
2009. That offered confirmation caused by all the lockdowns. That the 250-day moving average. The
along the way that a new bull market was some of the worst news we’ve 250-day moving average helps me
was starting in 2009. seen in our lifetimes. And yet, after to see the long-term trend. For the
the first month, the market just rallied shorter-term uptrend, I want to see
the 20-day moving average above the management? In particu-
60-day moving average. To consider lar, I love to see some sort
the market in an uptrend, I want ev- of new growth initiative or It’s important to look at
erything to be in an uptrend, both the whether they’re benefit- stock market breadth to
short-term and long-term averages. I ting from a major macro assess the overall health
want to see everything trending up or industry theme. So
on all the timeframes. I also want to I’m really looking for the
of the stock market.
see the trend outperforming the S&P best fundamentals and
500 over the past 250 days. the best technicals. That’s
Then I look for the percentage price how I look for individual stocks to Your website provides a lot of infor-
oscillator (PPO) line to be above its recommend. mation for both investors and people
signal line. That shows that there’s For ETFs, I start with the same tech- who are interested in short-term
positive price momentum in the nical screen, and then I go through trading as well, with a good mix
near term. the charts. I pick the best-looking of fundamental, economic, and
I don’t like to chase stocks when charts, and then I try to find one with technical information.
they’re overbought after they’ve had a compelling macro theme or trend. Thank you! The overarching pur-
a big short-term rally. So I like to see For ETFs, it’s generally better to go pose of my website service is to help
the RSI under 70. with a larger, more liquid, and less investors prosper better than they
That gets me to the first stage of expensive ETF. So I look for those. ever have before, by determining
analysis. Then I look through the Once I pick a trade I want to rec- when a bull market or bear market
stocks that pass that screen, and I ommend, I then apply all of my best is in place for a given investment, in-
narrow it down to maybe 10 or 12 forecasting experience to calling two cluding stocks, bonds, commodities,
of the best-looking charts. I like exit points: a profit target price and and cryptocurrencies like bitcoin.
to see something that’s early in a a loss-limiting downside stop to bail Understanding the bull/bear cycle
near-term momentum uptrend. It on any trade that moves too far in and knowing which we are in is im-
might be something that’s fallen a the wrong direction. We share both portant. Once you do that, you can
bit and is starting to perk up again. of these with our members up front invest more appropriately.
For that, I like to look at the PPO and they can optionally place simple In a stock bull market, you want
histogram, for when that just starts GTC and trailing stop-loss orders to invest in stocks with good, strong
to turn positive. with their own broker to automate an fundamentals, good technical pic-
At that point, I have a list of exit. For example, if the target is at tures, and that are outperforming the
stocks with great fundamentals $130 and we’ve officially entered at market. You also want to buy ETFs
and technicals. Then I start read- $100, a GTC order can direct a broker that are outperforming the market,
ing through their financials—their to automatically exit the position at have good themes, and have good
latest earnings releases, focusing $130. Ease of use like that underpins trends behind them. In a bull market,
on revenue and earnings growth, as everything in the service. you can even buy levered ETFs that
well as margins and ROE trends. I Timely recommendation issues are double or even triple long (2X
look for earnings upside and positive are blast emailed to all interested or 3X). So without going through
earnings revisions. I read the earn- members at the same time. The core the hard work of picking stocks, you
ings releases, financial documents, part—the recommendation itself—is could just buy an ETF. If you know
company presentations, sell-side in novice-friendly language that any you’re in a bull market, and you’re
analyst reports—since I did that for investor can understand. The rest of confident it will continue, you can buy
over 22 years as a securities analyst, the page is loaded with educational a levered ETF and beat the market
I’m very comfortable with individual rationale laying out exactly why we by a dramatic amount.
stock analysis. I’m trying to assess like this particular trade at this par- There are also stocks and ETFs that
a company’s quality and growth ticular time. And it always includes are appropriate for bear market envi-
prospects, and also understand the an annotated chart with key technical ronments. There are always places to
qualitative aspects of the industry indicators highlighted. A major goal make money in a bear market. You
and the business. What’s their spe- of the service is to help members could go to bond ETFs or gold ETFs,
cial sauce? What’s their competitive make money while also learning to which often go up during a bear mar-
advantage? What’s good about their become better investors. ket. In the 2008 bear market, gold and
nually and become very place, that meets the definition of a
wealthy. bear market.
The goal of every investor That’s an incredibly For example, in the bear markets
should be to keep earning powerful way to generate of the early 2000s and 2008–2009, if
high positive returns, so the wealth and significantly you had simply used the bear market
returns can be compounded outperform the typical rules I just mentioned, you could have
annually over time. buy-and-hold investor. made about a 30% return in both
Being able to identify of those bear markets if you were
when you’re in a bull mar- short the S&P 500. Compare that to
bonds each went up about 25% while ket or a bear market is key. I have four the buy-and-hold investor who lost
stocks fell about 60%. You could also rules to help identify bull and bear 30% during that time. You would
buy inverse ETFs. For example, the markets. A bull market is when: have about 85% more money than
inverse ETF with ticker SH that is the investor who lost money in the
indexed to the S&P 500 went up about 1. Price is above the 250-day mov- bear market!
90% in the 2008–2009 bear market. ing average That’s why I’m so passionate
And a double-short S&P 500-based 2. The 20-day MA is above the about helping individuals effectively
ETF went up about 180%. So you 250-day MA identify bull and bear markets and
can earn some enormous returns in 3. The 60-day MA is above the invest accordingly. That’s the best
bear markets, while most investors 250-day MA way to dramatically outperform
are suffering losses. 4. The slope of the 250-day MA traditional investing approaches year
Importantly, many investors don’t is positive after year.
realize how long bear markets can
last. Most investors think they are I use the 250-day MA instead Thank you, Jon.
very short and that the market will of the more popular 200-day MA
quickly rebound to new highs. But it because it tends to have fewer head Karl Montevirgen is a financial con-
doesn’t always work that way. It took fakes, fewer false messages. For a tent writer. His LinkedIn profile can
25 years for the S&P 500 to return to bull market, you want to see price be found at https://www.linkedin.com/
1929 levels, it took the NASDAQ 15 above the 250-day moving average. in/karl-montevirgen-4a66b517.
years to return to 2000 levels, it took You also want to see the shorter-term
gold 28 years to return to 1980 levels, smoothed trends—the 20-day and the Further reading
and Japan’s stock market is still 30% 60-day—above the long-term trend, Wolfenbarger, Jon [2022]. “Simple
lower than it was 32 years ago! which is the 250-day. And you also Rules To Profit From Bear Mar-
The goal of every investor should be want the slope of the 250-day MA kets,” Technical Analysis of
to keep earning high positive returns, to be positive. Stocks & Commodities, Volume
so the returns can be compounded an- When all four of those elements are 40: April.
nually over time to create significant in place, then technically speaking, Weinstein, Stan [1988]. Secrets For
wealth. That way, instead of losing you are in a bull market uptrend. Profiting In Bull And Bear Mar-
money during a bear market, you A bear market is just the inverse of kets, McGraw-Hill Professional
keep making profits, and then your all that. The price, the 20-day, and the Publishing.
returns will be compounded year over 60-day will all be below the 250-day,
year. If you can consistently do that, and the slope of the 250-day will be
you can earn double-digit returns an- negative. If all four of those are in
YOUR ONLINE RESOURCE

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remaining nine ETFs account for 0.6% of the total. out the leaders. Six of the newest ETFs had no distribu-
Obviously, the top six is where the current action is for tion yield yet.
Ticker DIVO BLOK SWAN IBUY YYY BATT CNBS ISWN MVPS IWIN EMFQ JGLD QSWN BIDS DTOX
Inception Date 12/14/2016 1/16/2018 11/6/2018 4/20/2016 6/21/2013 6/6/2018 7/23/2019 1/26/2021 7/21/2021 2/2/2022 1/30/2019 12/1/2020 12/9/2021 9/22/2021 6/24/2021
AUM ($MM) $1,049 $957 $723 $413 $391 $223 $73 $45 $12 $7 $6 $3 $3 $1 $1
Exp. Ratio 0.55% 0.71% 0.49% 0.65% 2.45% 0.59% 0.75% 0.49% 0.49% 0.85% 0.69% 0.49% 0.49% 0.59% 0.59%
Distribtion
Yield
5.01% 17.20% 5.46% 0.69% 9.93% 2.49% 0.70% 0.38% 0.00% 0.00% 0.10% 0.00% 0.00% 0.00% 0.00%
Holdings 24 43 0 79 0 87 27 0 149 0 38 52 0 26 81
Avg. Daily
Volume
307,647 562,657 275,722 90,928 186,681 140,972 73,623 10,058 5,066 33,396 2,712 6,639 2,302 440 590
Performance
−YTD
−4.67% −22.28% −8.98% −23.89% −8.93% −10.89% −14.01% −6.11% −22.30% −19.12% 0.58% −11.32% −15.14% −18.14%
Performance
−1 YR.
14.2% −39.5% 2.08% −50.06% −1.04% −7.50% −63.36% −4.24% −50.41% −12.54%
Performance
−3 YRS.
14.6% 28.5% 10.6% 12.5% 4.0% 8.9% 3.9%
Performance
−5 YRS.
12.8% 18.0% 4.3%
Net Flows
$MM − 1 YR.
$769 $508 ($56) ($871) $127 $116 $41 $19 $15 $7 ($16) $2 $3 $1 $1
Net Flows
$MM − 3 YRS.
$981 $1,155 $625 ($91) $228 $219 $156 $47 $15 $7 $4 $4 $3 $1 $1
Net Flows
$MM − 5 YRS.
$991 $1,292 $692 $142 $307 $227 $156 $47 $15 $7 $7 $4 $3 $1 $1
FIGURE 2: AMPLIFY ETF COMPARISON. DIVO, BLOK, and SWAN captured the majority of the assets. Six other Amplify ETFs have assets under
$8 million.
Cash inflows show mixed investor it provides adherence to the fund’s core goal.
interest • Tradability measures the fund’s liquidity, as well
Cashflows are the lifeblood for an ETF to remain a vi- as whether the ETF buyer receives a fair price in
able investment vehicle and to grow its footprint in its the open market.
category. DIVO has managed to have strong inflows over • Fit score pinpoints how closely an ETF comes to
one, three, and five years nearing $1 billion in each of matching its stated objective, as well as its per-
those periods. BLOK’s inflows exceeded DIVO’s for the formance measured against the FactSet segment
three- and five-year periods, both with $1.2 billion, but benchmark.
with $508 million in one-year flows, it came in at $261
million less than that of DIVO. The top ETF with the overall highest combinations of
One interesting story is SWAN, which captured nearly these three measurements is JGLD with a total combined
$700 million of inflows over both three and five years, score of 204.7. In close second position was DIVO with a
but bled $56 million for the past year. This ETF is combined score of 202.0. In third place was IBUY with
unique in that it “seeks uncapped exposure to the S&P a score of 158.21. On the other hand, YYY’s, IWIN’s
500 while buffering against the possibility of significant and QSWN’s total score of 68 were near the bottom
losses. Approximately 90% of the ETF will be invested with EMFQ sporting the lowest score of 48.6. Notice
in US Treasury securities, while that the fit score was only provided
Efficiency Tradability Fit Total
approximately 10% will be invested EFT Score Score Score Score for three ETFs, meaning that their
in SPY LEAP options in the form DIVO 78.04 77.99 46 202.03 unusual focus, performance, and
of in-the-money calls,” according BLOK 77.9 80.31 0 158.21 life span did not provide a measur-
to the Amplify website. The rising SWAN IBUY
69.13
56.49
0
80.54
0
25
69.13
162.03
able score.
market in 2021 no doubt turned YYY 67.69 0 0 67.69
off investors to this ETF’s hedging BATT 63.54 68.98 0 132.52 Trading volume and
objective. CNBS 76.91 54.9 0 131.81 performance comparison
YYY and BATT both had inflows IWIN MVPS 75.72
67.69
63.98
0
0
0
139.7
67.69
The trading volume leader out of all
over $200 million over three and EMFQ 0 48.62 0 48.62 the Amplify ETFs is BLOK with
five years, with $100 million over QSWN 67.88 0 0 67.88 over 560,000 shares a day, followed
one year. CNBS gathered over $150 JGLD 75.91 67.75 61 204.66 by DIVO at 307,000. Close by is
million over these longer periods, DTOX SWAN at 275,000. YYY and BATT
BIDS 70.32 64.71 0 135.03
75.72 63.98 0 139.7
but fell off to $41 million of inflows FIGURE 3: FACTSET RATINGS. Here, the top- have decent volume at 187,000 and
in the most recent period. The big ranked ETFs are JGLD, DIVO, IBUY and BLOK. 141,000, respectively. IBUY comes
disappointment has been IBUY in The weakest are EMFQ, IWIN, and YYY. in sixth at 91,000 and CNBS at near
the hot online retail sector; IBUY 75,000. All the remaining ETFs
had a huge one-year outflow of $871 million after losing have volume below 11,000, except for IWIN at 34,000.
only $91 million after three years. Clearly, the volatility The total daily trading volume for all these ETFs is 1.7
in the online retail space and the poor year-to-date and million shares, which is miniscule for a family of 15
one-year principal loss of 50% were contributing factors. ETFs. Thus, investors and traders are not paying too
For seven of these ETFs offered since 2021, their minimal much attention to these ETFs.
one-year inflows of less than $7 million, in most cases, Moving on to ETF price performance, we can observe
are not an encouraging sign going forward. that the year-to-date performance for 14 ETFs was nega-
tive, which is also the case for the market as a whole. In
FactSet ratings particular, there was only one positive performer, JGLD
ETFAction.com use FactSet as its primary data source. (+0.58%), as gold and metals held up well this year. DIVO
That firm provides its quantitative proprietary ratings for declined only 4.7% and ISWN fell 6.1%. The worst per-
each ETF (Figure 3), which encompasses three areas: formers were IBUY cratering 24%, followed by BLOC
efficiency, tradability, and fit score. These metrics range down 22%, EMFQ down 19%, and DOTX down 18%.
from a low of zero to a high of 100. In comparison, the S&P 500 was down only 8.6%, and
that’s better than all these ETFs except for DIVO, which
• Efficiency score measures the degree to which an fell 4.7%, and ISWN, which declined 6.11%.
ETF matches its underlying index, including its Only seven of these ETFs sported three-year perfor-
expense ratio and structural risk, as well as whether mance data. Figure 4 provides a comparison of these
STOCKCHARTS.COM
FIGURE 4: AMPLIFY THREE-YEAR PERFORMANCE. BLOK led with a 141% gain, outpacing the QQQ by 30 basis points. All other ETFs performed
worse than SPY and QQQ.
seven to the S&P 500 and NASDAQ QQQ. Clearly, only distribution yield of 5.01%. It maintains an up capture
BLOK (in red) outpaced their brethren and the indexes ratio of 72.7% and a down capture ratio of 83.3% and
with an impressive 141% gain from the common date of is 91% correlated with the S&P 500. Its largest sector
January 19, 2019 through March 1, 2022. EMFQ was the holding is information technology at 18.5% followed by
worst performer, up only 12.3%, followed by YYY, up financials at 14.6%, and then consumer discretionary at
16%. Even though these ETFs had unusually concentrated 13.8%. Its top five holdings in order are CVX, UNH,
portfolios, they could not even match the indexes with AAPL, MCD, and V, all with about a 5–6% weighting.
less volatility, and that’s disappointing. DIVO also has 15 names in common with the Dow Jones
One-year performance was mostly down with IBUY Industrial Average with a 49% overlap weight.
and EMFQ cratering 50% while BLOK gave up 40%. DIVO competes with 16 ETFs employing some form
CNBS was even worse, down 63%. There were only two of covered call writing strategy and has the third largest
winners: DIVO advanced 14% and SWAN inched up 2%. AUM with AUM of over $1 billion. The two leaders are
Only three ETFs (DIVO, IBUY, and YYY) had five-year Global X QYLD and XYLD with AUM of $6.5 billion,
track records and their performance was positive—up 4% and $1.1 billion, respectively. Its annual expense ratio of
to 18% compared to the S&P 500’s gain of 14.4%. 0.55% is the third lowest in the category and its yield is
in the middle of this category. QYLD and XYLD offer
Amplify CWP-Enhanced Dividend Income ETF distribution yields of 13.9% and 9.82%, respectively,
(DIVO) compared to DIVO’s 5.01%. DIVO offered the best
Let’s cover the workings of the six largest ETFs as mea- one-, three-, and five-year performance of this grouping,
sured by AUM, since those would be of most interest to which is noteworthy. It was significantly better than that
investors and traders. of QYLD and XYLD by 600 basis points over three and
First up is DIVO. CWP stands for Capital Wealth five years.
Planning, which is the sub-adviser. It has a 5-star Morn-
ingstar Rating. This actively managed ETF selects 24 Amplify Transformational Data Sharing ETF
blue-chip high-dividend large-cap stocks from the S&P (BLOK)
500 universe using a tactical call writing approach that This actively managed ETF’s goal is to invest at least
minimizes risk. Factors used to select these stocks in- 80% of its assets in public global companies heavily
clude: size, management performance, earnings growth, involved in the research, development, and use of block-
cash flow, and ROE. chain technology. It came to market on January 16, 2018,
It invests 90% of its assets in US Treasuries, with beating its rival BLCN by one day as the first ETF in its
the remaining 10% placed in SPY LEAP in-the-money category, and already has amassed almost $1 billion in
options. Dividends and option income help offset any assets compared to BLCN’s smaller $208 million. BLOK
declining share price. It is the largest Amplify ETF based has gathered 57% of the AUM in its 15 ETF bitcoin
on its AUM of over $1 billion and it offers a competitive category, partly due to its early entry date.
FIGURE 5: BLOK VS. COMPETITORS. BLOC came in second with a gain of 92% after a roller-coaster ride in 2021 and 2022 with high volatility. QQQ
was the leading performer, up 105%.
There are 43 holdings in its portfolio, of which the top SPY underperformed most of these ETFs with a gain of
five are: Silvergate Capital Corp. (SI), SBI Holding Inc. 64%. LEGR and the SPY track closely with KOIN. The
(8473-JP), Coinbase Global, Inc. (COIN), and NVIDIA consistent winner of the three is BLCN, which is more
Corporation (NVDA). They all have a 4.3% weighting. volatile than KOIN or LEGR.
Its current 17.2% distribution yield is exceptionally high,
mostly the result of its one-time $5.75 year-end payment Amplify Blackswan Growth & Treasury Core ETF
on December 29, 2021. (SWAN)
BLOK has a beta of 1.4, an annualized alpha of 14.7%, This passively managed ETF focuses on providing near-
and an up capture ratio of 184.4% versus a down capture market returns with built-in protection to avoid large
ratio of 95.5%, which are all indicative of a desirable market losses. It has a 5-star Morningstar Rating. SWAN
risk-to-reward basis, especially for traders. However, tracks an index of long-dated SPY options and US Trea-
with its high standard deviation of 38.7%, expect high suries with an average 10-year maturity. EFTAction.com
volatility and big drawdowns along the way. classifies this ETF as a “synthetic” equity ETF of which
Its largest sector holding is information technology there are a dozen in their database with a total AUM
at 54% followed by financials at 30%, and then both of $8.6 billion. Investors or traders considering ETFs
consumer discretionary and communications services in this category should evaluate them in great detail to
at 4% each. BLOK has 11 to 26 names in common with determine their exact focus and makeup, as each may use
the other 15 ETFs in its category. Its annual expense a different strategy and have unique risks despite the fact
ratio of 0.71% is in the midrange while the number of that all are classified under the “synthetic” label. Only
its holdings at 43 is 50% higher than BLCN’s. the three Amplify ETFs in this category are truly black
Compared to its competitors, BLOK has outpaced swan-focused in their strategy.
them all, not only in AUM growth but in performance, For example, the AUM and category killer is JPMorgan
with a three-year annualized return of 29% compared Equity Premium Income ETF (JEPI) with a $6.9 bil-
to 17% for BLCN, 11.5% for LEGR, and 16.59% for lion (79% of all the AUM) footprint since its May 2020
KOIN, but over a one-year time horizon it has fared the inception. That unbelievably high AUM level achieved
worst, losing 32% compared to BLCN’s loss of 24% and in less than two years and JPMorgan’s reputation were
LEGR’s loss of 1%, while KOIN was flat as of the March definitely a plus. However, JEPI is not a black swan-type
1, 2022 closing date. ETF. It is actively managed, invests in large-cap stocks
Figure 5 compares their performance. Clearly, BLOK and equity-linked notes, and strives to provide S&P 500
(red line) had wild percentage swings since January returns with lower volatility and monthly income.
2021 as the top performer over the common period from SWAN came in second with AUM of $723 million
January 30, 2018 through March 2, 2022, with a gain with a November 2018 inception date. JEPI has an
of 94% compared to 59% for BLCN, 70% for KOIN, annual expense ratio of 0.35% compared to 0.49% for
and 41% for LEGR. Actually, the NASDAQ QQQ beat SWAN. JEPI also outperformed SWAN with a one-year
them all with a gain of 112% with a smoother ride, but performance of 13.9% versus 4.1% for SWAN. Looking
FIGURE 6: SWAN VS. SPY. SWAN minimized its losses to 7.89% during the big 33% decline in late February 2020 through March 23, 2020, but
floundered during the subsequent powerful rally with a 25-percentage point deficit compared to the SPY.
at year-to-date inflows/outflows, JEPI has pulled in $1.4 How did SWAN perform in the declining market
billion compared to an outflow of $94 million for SWAN, from December 28, 2021 through March 4, 2022?
not a good omen. SWAN declined 7.65% compared to 9.37%, not such a
SWAN has a 0.49% annual expense ratio and a dis- great difference. However, were this decline to deepen,
tribution yield of 5.46% mostly resulting from a $1.67 SWAN will outperform even more. Overall, SWAN’s
payout on December 29, 2021. Otherwise, the average performance is lacking, especially in rising markets, as
yield would have been 1.92%. just shown. How did JEPI perform compared to SPY and
The annual returns have declined each year since 2019 SWAN over a common period of May 21, 2020 through
with a 22% return that year, 16.2% in 2020, 10.6% in March 4, 2022? SPY was the winner, up 50%. JEPI was
2021, and −7.6% YTD. The same situation has occurred second, up 38.5%, and SWAN pulled up in last place at
with monthly money flows since November 2021, where 13.8%, the laggard by far.
inflows were $19 million but outflows occurred in De-
cember 2021 of $23 million, $41 million in outflows in Amplify High Income ETF (YYY)
January 2022, and $52 million in outflows in February This passively managed ETF was born in June 2013
2022. The trends in both parameters are going in the and has gathered $391 million in AUM. YYY consists
wrong direction. of a portfolio of 45 high-income-producing multi-asset
The problem seems to be that the up capture ratio closed-end funds managed by a variety of well-known
is 37% and the down capture ratio is 40%—not very asset managers and strategies. This is basically a fund
good overall. Its goal is a target delta of 70% with the of funds that provides a monthly dividend, which is
S&P 500 in each direction. SWAN has a 58% correla- currently $0.12 per share. The portfolio is based on an
tion with the S&P 500 index, a beta of 0.39%, and an ISE High Income Index using a rules-based approach.
annualized alpha of 4%. Its annualized return is about The CEFs are ranked on yield, discount to NAV, and
675 basis points worse than that of the S&P 500, which liquidity. The index is evaluated, reconstituted, and re-
has gained 18%. balanced semi-annually each January and July, instead
Interestingly, during the 32.3% market crash from of annually. Investors purchasing CEFs typically look
February 21 to March 23, 2020, SWAN declined only for those funds that are priced below their NAV, since
7.8%, quite a sterling performance. Figure 6 shows the
performance of SWAN compared to SPY since its No-
vember 6, 2018 inception. Through February 19, 2020,
SWAN had equal performance to SPY with a much Cashflows are the lifeblood
smoother trend. Moreover, its performance in March, as for an ETF to remain a viable
just mentioned, was superior. But since November 3, 2020, investment vehicle and to grow
SPY’s price accelerated higher with SWAN advancing its footprint in its category.
much less so. By March 4, 2022, the SPY was up about
66% compared to 41% for SWAN.
BYD Company Limited (4.36%), and GLEN (4.26%).
Further down the list is Rivian Automotive (RIVN) and
The firm has added three Lucid Group Inc. (LCID).
“black swan” ETFs that focus As far as sector mix, 48% are materials companies,
on protecting downside risk in 21% are consumer discretionary, 21% are industrials,
and 9.5% are information technology. About 21% of
declining markets. the companies are based in the US, 46% are developing
ex-US companies, and 32% are emerging market firms.
Asia has the brunt of the companies at 44%, followed by
there is an opportunity for price appreciation in addition North America at 27%, and Pacific companies at 15%.
to the income available. Europe is at 9%, and Latin America, Middle East, and
Its expense ratio of 2.45% eats into the current distribu- Africa are less than 2% each. Interestingly, 76% of the
tion yield of 9.93%. There is a decent daily share volume companies are large-cap, with an equal 12% each divided
of $187,000 shares. It has a five-year annual performance between small- and mid-cap.
of 4.3% and 4% over three years. However, its one-year BATT has a standard deviation of 33.6%, a Sharpe
performance of −1% was weak. Nonetheless, it has been ratio of 0.30, a beta of 1.58, and an annualized alpha of
able to bring in inflows of $127 million over one year, −6.58%. Moreover, its up capture ratio is 110% compared
$219 million over three years. to its down capture ratio of 118%.
YYY has a beta of 0.95 and an annualized alpha of ETFAction.com tracks three battery ETFs, with the two
−7.73%. It has an up capture ratio of 61.8% and a down competitors being Global X lithium Battery Tech (LIT)
capture ratio of 0.97%. It also has a correlation coefficient with an inception date of July 2010, and WisdomTree
of 84% with iShares MSCI ACWI ETF benchmark. Battery Value Chain and Innovation Fund (WBAT)
For the 276 ETFs in the high-income ETF category, the with a February 7, 2022 inception date. Clearly, LIT,
average expense ratio is 0.48%, according to ETFAction. with AUM of $4.8 billion and an earlier inception date,
com (the data provider used for this article). YYY had dwarfs BATT’s $223 million and WBAT’s $2 million.
the seventh-highest expense ratio in this large category, Performance-wise, it’s the same scenario, with LIT
but it had the highest annual yield of 9.85%. However, it crushing BATT, with a three-year annualized return
was the 13th worst performance year-to-date. of 36% compared to 8.3% for BATT. Furthermore, as
far as their one-year return, LIT also leads with 25.5%
Amplify Lithium & Battery Technology ETF versus 4.6%. As far as inflows, LIT also dominates with
(BATT) $1.5 billion in inflows over a year versus $88 million
This actively managed ETF was born in June 2018 and for BATT through March 4, 2022, and $3.1 billion in
has been able to gather $223 million in AUM. BATT’s inflows over three years versus $215 million for BATT.
portfolio consists of companies generating significant Based on all these comparisons, BATT is the underdog
revenue from the development, production, and use of and the laggard.
lithium battery technology, including battery storage solu-
tions, battery metals & materials, and electric vehicles. Amplify Online Retail ETF (IBUY)
BATT tracks investment results that correspond generally This passively managed ETF came to market in April
to the EQM Lithium & Battery Technology Index. 2016 and has captured $413 million in assets with an
“The lithium-ion battery market is expected to grow expense ratio of 0.65% and a distribution yield of 0.69%.
from an estimated $44.2 billion in 2020 to $94.4 bil- Its portfolio of 79 stocks focuses on those companies
lion by 2025, a compound annual growth rate (CAGR) in the online retail corridor. The top five holdings are:
of 16.4%. A number of factors continue to fuel growth EXPE (3.27% weighting), CHGG (2.58%), SEAT (2.58%),
in lithium-ion batteries, including continued demand AMZN (2.52%), and ABNB (2.52%).
for mobile devices, electric vehicle adoption, and a ris- This ETF has a standard deviation of 34.9%, a Sharpe
ing need for energy storage solutions,” according to the ratio of 0.34%, a beta of 1.57, and an annualized alpha
Amplify website. of −4.44%. The up capture ratio is 137.5% versus the
BATT has a 0.59% expense ratio and a 2.49% yield with down capture ratio of 129.1%. The portfolio composition
a portfolio count of 87. The top five holdings and their consists of 76% US companies, 15% ex-US developing
weighting are as follows: BHP (7.88%), TSLA (6.21%), countries, and 8.5% emerging markets. Over three-
Contemporary Amperex Technology Co. Ltd. (6.19%), quarters of the firms are in North America, with 13%
in Asia, and 8% in Europe. As far as market cap, the (DTOX) are both less than a year old with assets under
overwhelming majority of companies are large-cap at $1 million—hardly worth the trouble of bringing them to
42%, with 33% small-cap and 25% mid-cap. And as far market. The launch of Amplify Pure Junior Gold Miners
as sector participation, 76% of the companies are in the (JGLD) in December 2020 is questionable, as there were
consumer discretionary sector. eleven other gold miner ETFs in the category, with GDX
ETFaction.com tracks 10 ETFs in the online retail being the behemoth with $14.5 billion and GDXJ with
space. Each company has a unique focus. Therefore, $4.8 billion, compared to JGLD’s $3 million. And three
due diligence is required to make sure that their differ- more gold miner ETFs have already joined the category
ences are noted. I will not go into the nitty-gritty here, since then, making the competition even stiffer.
but you should if you are interested in this category. The
closest competitor is ProShares Online Retail (ONLN) Conclusions
with $100 million more in assets than IBUY, although After reviewing all the ETFs in the Amplify family, I
it came to market more than two years later. The one- have concluded that there is no overwhelming reason
year performance for IBUY is a loss of 50% compared to invest in or trade in any of them, since competitive
to −44% for ONLN. For the three-year annualized per- ETFs typically have the edge in assets, earlier inception
formance, IBUY comes out ahead with a gain of 8.4% dates, and performance. The “black swan” ETFs, which
versus 4.9% for ONLN. are unique in their focus, may excel in big bear markets,
IBUY has 79 holdings compared to 38 in ONLN. Thirty but that remains to be seen.
names are in both portfolios. So basically, IBUY has Blockchain is a hot topic and will be in the foresee-
all but eight of ONLN’s holdings plus an additional 49 able future as crypto currencies gain momentum among
companies making it less concentrated with less risk. For institutions and individuals around the world. Therefore,
both ETFs, AMZN is weighted 13.5% in total, whereas of all these ETFs, BLOK is the one to pay attention to
the next four holdings are less than 4%, which include going forward and to place in a watchlist. Ric Edelman,
EBAY, ETSY, CHWY, and PETS. founder of Digital Assets Council of Financial Profes-
sionals, whom I interviewed for the May 2022 issue of
Other Amplify ETFs this magazine, recommends that investors place a 1%
The most recent ETF launched in the Amplify space was to 2% portfolio allocation in the cryptocurrency and
the Amplify Inflation Fighter ETF (IWIN) on 2/2/22. It has blockchain category and hold the investment for the very
attracted $7 million in AUM. There are three “black swan” long term. If their performance plays out as he expects,
ETFs that cover various market segments but with the their value in decades from now could be substantial.
same overall defensive strategy. These are SWAN, ISWN, (For an in-depth discussion of this emerging field, grab
and QSWN. Their performance over their short life is a copy of Edelman’s latest book The Truth About Crypto
similar, so the question is why Amplify added to more published in May 2022 by Simon & Schuster.) And even
ETFs in this category to SWAN since that could dilute if those investments end up going completely belly-up, a
SWAN’s position as the dominant one in their offerings. 2% portfolio loss would be tolerable to most investors.
Moreover, ISWN has attracted only $19 million in assets
since its January 2021 launch, and QWSN has grabbed S&C Contributing Writer and ETF Columnist Leslie N.
only $3 million since its December 2021 birth. Masonson is president of Cash Management Resources,
Amplify Digital & Online Trading ETF, with the a firm focusing on ETF strategies. He is an active NAS-
catchy “BIDS” ticker, and Amplify Cleaner Living ETF DAQ futures and ETF trader, and the author of six books
including Buy—Don’t Hold: Investing With ETFs Using
Relative Strength To Increase Returns With Less Risk,
and All About Market Timing, as well as Day Trading
This actively managed ETF On The Edge. He can be reached at lesmasonson@
selects 24 blue-chip high- yahoo.com.
dividend large-cap stocks from
‡amplifyetfs.com
the S&P 500 universe using a ‡See Editorial Resource Index
tactical call writing approach
that minimizes risk.

The focus of Traders’ Tips this • Traders.com → S&C Magazine →
month is Vitali Apirine’s article in Traders’ Tips
the January 2022 issue, “Rela-
tive Strength Moving Averages, At Traders.com you can also right-click on any
Part 1: The Relative Strength Ex- chart to open it in a new tab or window and view
ponential Moving Average (RS the chart at a much larger size.
EMA).” Here, we present the May The Traders’ Tips section is provided to help read-
2022 Traders’ Tips code with pos- ers implement a selected technique from an article in
sible implementations in various this issue or another recent issue. The entries here
software. are contributed by software developers or program-
The code for the following Trad- mers for software that is capable of customization.
ers’ Tips selections is posted here:
Cdwn( 0 ),
RS( 0 ),
Rate( 0 ),
F TRADESTATION: MAY 2022 TRADERS’ TIPS CODE CalcValue( 0 );
In part 1 of a three-part series focused on differences between
Mltp1 = 2 / ( Periods + 1 );
traditional EMAs and relative strength-based EMA indica- Cup = Iff( Close > Close[1], Close - Close[1] , 0 );
tors, author Vitali Apirine introduces the relative strength Cdwn = Iff( Close < Close[1], Close[1]-Close, 0 );
exponential moving average (RS EMA). The study is designed RS = AbsValue( XAverage( CUP, Pds )- XAverage( Cdwn, Pds )
)/
to account for relative strength of price and is considered a ( XAverage( CUP, Pds ) + XAverage( Cdwn, Pds ) + 0.00001 );
trend-following indicator that can be used in combination with
an EMA of the same length to identify the overall trend. RS RS = RS * Mltp;
Rate = Mltp1 * ( 1 + RS );
EMAs with different lengths can define turning points and
filter price movements. CalcValue = Iff( CurrentBar = 1, Close, CalcValue[1] + Rate *(
Close - CalcValue[1] ) );
Indicator: TASC MAY 2022 RS EMA
inputs: Plot1( CalcValue );
Periods( 50 ),
Pds( 50 ),
Mltp( 10 );
A sample chart is shown in Figure 1.
This article is for informational purposes. No type of
variables: trading or investment recommendation, advice, or strategy
Mltp1( 0 ),
Cup( 0 ),
is being made, given, or in any manner provided by TradeS-
tation Securities or its affiliates.
—John Robinson
TradeStation Securities, Inc.
www.TradeStation.com
F TRADINGVIEW: MAY 2022 TRADERS’ TIPS CODE

Here is the Pine Script code for use in TradingView that
implements the relative strength exponential moving average
(RS EMA), which is described in the January 2022 article by
Vitali Apirine titled “Relative Strength Moving Averages,
Part 1: RSEMA.”
// TASC Issue: May 2022 - Vol. 40, Issue 5
// Article: Relative Strength Moving Averages
// Part 1: The Relative Strength
// Exponential Moving Average (RS EMA)
// Article By: Vitali Apirine
// Language: TradingView's Pine Script v5
// Provided By: PineCoders, for tradingview.com
FIGURE 1: TRADESTATION. A TradeStation daily chart of the S&P 500 index
($SPX.X) with the RS EMA indicator (in blue) and a 50-day exponential moving //@version=5
average (in red) applied. The RS EMA indicator is applied with the inputs 50, 50, indicator(title='TASC 2022.05 RS EMA', overlay=true)
and 10.

FIGURE 2: TRADINGVIEW. Shown is an example of the relative strength exponen-
tial moving average (RS EMA) on a chart of the S&P 500 index.
int periods = input.int( title='EMA Length:' , defval=50)

int pds = input.int( title='RS Length:' , defval=50)
float mltp = input.float(title='RS Multiplier:', defval=10.0)
FIGURE 3: ESIGNAL. Here is an example of the study plotted on a daily chart of
rsema ( float source = close, $RUT.
simple int periods = 50,
simple int pds = 50,
float multiplier = 10.0 chart and select “edit chart”). A sample chart is shown in
) =>
float mltp1 = 2.0 / (periods + 1.0)
Figure 3.
float diff = ta.change(close) To discuss this study or download a complete copy of the
float cup = diff > 0 ? diff : 0.0 formula code, please visit the EFS library discussion board
float cdn = diff < 0 ? math.abs(diff) : 0.0
float acup = ta.ema(cup, pds)
forum under the forums link from the support menu at www.
float acdn = ta.ema(cdn, pds) esignal.com or visit our EFS KnowledgeBase at www.esig-
float rs = math.abs(acup - acdn) nal.com/support/kb/efs. The eSignal formula script (EFS)
rs /= (acup + acdn + 0.00001)
rs *= multiplier
is also available for copying & pasting from the Stocks &
float rate = mltp1 * (1.0 + rs) Commodities website at Traders.com in the Traders’ Tips
float rsema = close section.
float prev = nz(rsema[1])
rsema := prev + rate * (close - prev) /**********************************
rsema Provided By:
Copyright 2019 Intercontinental Exchange, Inc. All Rights Re-
float rsema = rsema(close, periods, pds, mltp) served.
eSignal is a service mark and/or a registered service mark of
plot(series=rsema, title='RS EMA', color=color.green) Intercontinental Exchange, Inc.
in the United States and/or other countries. This sample eSignal
The indicator is available on TradingView from the Pine- Formula Script (EFS)
is for educational purposes only.
CodersTASC account: Intercontinental Exchange, Inc. reserves the right to modify and
overwrite this EFS file with each new release.
tradingview.com/u/PineCodersTASC/#published-scripts
Description:
—PineCoders, for TradingView Relative Strength Moving Averages
by Vitali Apirine
www.TradingView.com
Version: 1.00 09/03/2022
Formula Parameters: Default:

Periods 50
Mltp 10
F eSIGNAL: MAY 2022 TRADERS’ TIPS CODE
For this month’s Traders’ Tip, we’re providing the study RS
Notes:
EMA.efs based on the article by Vitali Apirine in the Janu- The related article is copyrighted material. If you are not a sub-
ary 2022 issue, “Relative Strength Moving Averages, Part 1: scriber
The RS EMA.” of Stocks & Commodities, please visit www.traders.com.
The study contains formula parameters that may be con- **********************************/
figured through the edit chart window (right-click on the var fpArray = new Array();

var bInit = false;
return ret;
function preMain() { }
setStudyTitle("RS EMA"); var ret = 0;
setCursorLabelName("RS EMA", 0); function Calc_Cdwn(xClose){
setPriceStudy(true); var ret = 0;
setDefaultBarFgColor(Color.RGB(0x00,0x94,0xFF), 0); if (xClose.getValue(0) < xClose.getValue(-1)){
setPlotType( PLOTTYPE_LINE , 0 ); ret = xClose.getValue(-1) - xClose.getValue(0);
setDefaultBarThickness(2, 0); }
else ret = 0;
var x=0;
fpArray[x] = new FunctionParameter("Periods", FunctionPa- return ret;
rameter.NUMBER); }
with(fpArray[x++]){ var ret = 0;
setLowerLimit(1); function Calc_Cup(xClose){
setDefault(50); var ret = 0;
} if (xClose.getValue(0) > xClose.getValue(-1)){
fpArray[x] = new FunctionParameter("Pds", FunctionParam- ret = xClose.getValue(0) - xClose.getValue(-1)
eter.NUMBER); }
with(fpArray[x++]){ else ret = 0;
setLowerLimit(1);
setDefault(50); return ret;
} }
fpArray[x] = new FunctionParameter("Mltp", FunctionParam-
eter.NUMBER); function verify(){
with(fpArray[x++]){ var b = false;
setLowerLimit(1); if (getBuildNumber() < 779){
setDefault(10);
} drawTextAbsolute(5, 35, "This study requires version 10.6 or
} later.",
Color.white, Color.blue, Text.RELATIVETOBOTTOM|Text.
var bVersion = null; RELATIVETOLEFT|Text.BOLD|Text.LEFT,
var xClose = null; null, 13, "error");
var RS = null; drawTextAbsolute(5, 20, "Click HERE to upgrade.@
var RS_1 = null; URL=http://www.esignal.com/download/default.asp",
var Mltp1 = null; Color.white, Color.blue, Text.RELATIVETOBOTTOM|Text.
RELATIVETOLEFT|Text.BOLD|Text.LEFT,
function main(Periods, Pds, Mltp) { null, 13, "upgrade");
if (bVersion == null) bVersion = verify(); return b;
if (bVersion == false) return; }
else
if ( bInit == false ) { b = true;
xClose = close();
Mltp1 = 2 / (Periods+1); return b;
RS = 0; }
RS_1 = 0;
—Eric Lippert
xCup = efsInternal('Calc_Cup', xClose); eSignal, an Interactive Data company
xCdwn = efsInternal('Calc_Cdwn', xClose);
xRS = efsInternal('Calc_RS', xCup, xCdwn, Pds, Mltp); 800 779-6555, www.eSignal.com
bInit = true;
}
if (getCurrentBarCount() <= Periods) return;
if (getBarState() == BARSTATE_NEWBAR) {
RS_1 = RS;
RS = 0; F WEALTH-LAB: MAY 2022 TRADERS’ TIPS CODE
} In his article in January 2022 issue, Vitali Apirine introduces
a new EMA-like smoothing indicator that accounts for rela-
Rate = Mltp1 * (1+xRS.getValue(0));
if (getCurrentBarCount() == Periods + 1) ret = xClose.get- tive strength of price.
Value(0); To see how easy is to verify whether a trading idea works
else ret = RS_1 + Rate * (xClose.getValue(0) - RS_1); or not, we will construct a quick and dirty system using
RS = ret;
Wealth-Lab’s Building Blocks. Knowing that bullish and
return RS; bearish crossovers can be used as entry points for trades, we
} drag and drop just the two crossover rules:
function Calc_RS(xCup, xCdwn, Pds, Mltp){
x1 = ema(Pds, xCup); • Entry. Medium-term RSEMA (50,50,10) crosses above
x2 = ema(Pds, xCdwn); a long-term 200-period EMA
ret = Math.abs(x1 - x2);
ret = ret / (ema(Pds, xCup) + ema(Pds, xCdwn) + 0.00001); • Exit. Medium-term RSEMA (50,50,10) crosses below a
ret = ret * Mltp; long-term 200-period EMA

FIGURE 4: WEALTH-LAB. Prototyping a trading system is a simple task for Wealth-
Lab 7.
FIGURE 6: NINJATRADER. The chart showcases RSEMA(10,50,50) and RSE-
MA(10,20,20) applied to daily FTSE 100 index futures data from October 2017 to
May 2018.
menu File → Utilities → Import NinjaScript and select the

downloaded file.
You can review the indicator’s source code in NinjaTrader
8 by selecting the menu New → NinjaScript Editor → Indi-
cators from within the control center window and selecting
the RSEMA file. You can review the indicator’s source code
FIGURE 5: WEALTH-LAB. Sample trades taken by the system are applied to a
daily chart of SPY.
in NinjaTrader 7 by selecting the menu Tools → Edit Nin-
jaScript → Indicator from within the control center window
Without investing much effort, we created a trading sys- and selecting the RSEMA file.
tem in a few clicks in just a few minutes of time (Figure 4). NinjaScript uses compiled DLLs that run native, not in-
Figure 5 shows characteristic trades in the times of uptrends, terpreted which provides you with the highest performance
trading ranges, and market corrections. Does the idea has possible.
merit? Further backtesting and walk-forward analysis would A sample chart displaying the indicator is shown in Figure
help shed light on it. 6.
—Gene Geren (Eugene) —Brandon Haulk
Wealth-Lab team NinjaTrader, LLC
www.wealth-lab.com www.ninjatrader.com
F NEUROSHELL TRADER: MAY 2022 TRADERS’

TIPS CODE
F NINJATRADER: MAY 2022 TRADERS’ TIPS CODE The relative strength exponential moving aver-
The RS EMA indicator, as detailed in the January 2022 S&C age can be easily implemented in NeuroShell Trader using
article titled “Relative Strength Moving Averages” by Vitali NeuroShell Trader’s ability to call external dynamic linked
Apirine, is available for download at the following links for libraries (DLLs). Dynamic linked libraries can be written in
NinjaTrader 8 and for NinjaTrader 7: C, C++, and Power Basic.
After moving the code given in the article to your pre-
NinjaTrader 8: www.ninjatrader.com/SC/May2022SCNT8.zip
NinjaTrader 7: www.ninjatrader.com/SC/May2022SCNT7.zip ferred compiler and creating a DLL, you can insert the re-
sulting indicator as follows:
Once the file is downloaded, you can import the indicator
into NinjaTrader 8 from within the control center by select- 1. Select “new indicator” from the insert menu.
ing Tools → Import → NinjaScript Add-On and then select- 2. Choose the External Program & Library Calls cat-
ing the downloaded file for NinjaTrader 8. To import in Nin- egory.
jaTrader 7 from within the control center window, select the 3. Select the appropriate External DLL Call indicator.

4. Setup the parameters to match your DLL.
5. Select the finished button.
NeuroShell Trader users can go to the Stocks & Com-

modities section of the NeuroShell Trader free technical
support website to download a copy of this or any previous
Traders’ Tips.
—Ward Systems Group, Inc.
sales@wardsystems.com
www.neuroshell.com
F OPTUMA: MAY 2022 TRADERS’ TIPS CODE

Here is the code translation for the January 2022 article “Rela- FIGURE 7: NEUROSHELL TRADER. This NeuroShell Trader chart shows the stan-
tive Strength Moving Averages, Part 1: RSEMA” by Vitali dard EMA versus relative strength EMA.
Apirine, for use on the Optuma platform.

#$EMABar = 50;
#$RSBar = 50;
#$MLTPBar = 10;
MLTP = 2 / (VarToList(VAL=$MLTPBar) + 1);
MLTPRS = 2 / (VarToList(VAL=$RSBar) + 1);
Gain = IF(Close() IsUp, Close() - Close()[1], 0);
Loss = IF(Close() IsDown, Close()[1] - Close(), 0);
EMAGain = MA(Gain,CALC=Close, STYLE=Exponential,
BARS=$EMABar);
EMALoss = MA(Loss,CALC=Close, STYLE=Exponential,
BARS=$EMABar);
RS=ABS(EMAGain - EMALoss) / (EMAGain + EMALoss) +
0.00001;
RSEMA = RSEMA[1] + MLTP * (1 + RS * MLTPRS) * (Close() -
RSEMA[1]);
RSEMA FIGURE 8: OPTUMA. This sample chart displays the RS EMA on a chart of the
S&P 500 index.
—support@optuma.com
Optuma.com
F TRADERSSTUDIO: MAY 2022 TRADERS’

TIPS CODE
The importable TradersStudio files based on
Vitali Apirine’s January 2022 article, “Relative Strength Ex-
ponential Moving Averages, Part 1: The RS EMA,” can be
obtained on request via email to info@TradersEdgeSystems.
com. The code is also available on this magazine’s website at
Traders.com in the Traders’ Tips section.
Code for the author’s indicators is provided in following
files:
Function RSEMA: Computes the RSEMA moving

average indicator
Indicator plot RSEMA_IND: Plots the RSEMA indicator
FIGURE 9: TRADERSSTUDIO. Shown here is the RSEMA(50,50,10) in red and a
on a chart EMA(50) in cyan on a chart of Cisco Systems.
A sample TradersStudio chart is shown in Figure 9.
'Periods = 50, Pds = 50, Mltp = 10
CODE: Dim MLTP1
'Relative Strength Exponential Moving Average Dim Cup As BarArray
'Author: Vitali Apirine, TASC Jan 2022 Dim Cdwn As BarArray
'Coded by: Richard Denning, 3/8/2022 Dim RS As BarArray
Dim Rate
Function RSEMA(Periods, Pds, Mltp) Dim RSe As BarArray

MLTP1 = 2/(Periods + 1) vixDN=Round((VIX/(HighestBar(VIX,25,1))-1),0)*100
Cup = IIF(C>C[1],C-C[1],0) vixUP=Round((VIX/(LowestBar(VIX,25,1))-1),0)*100
Cdwn = IIF(C<C[1],C[1]-C,0) myATR=ATR(H,L,C,15)
RS=Abs(XAverage(Cup,Pds,0)-XAverage(Cdwn,Pds,0))/(XAvera atrDN=Round((myATR/(HighestBar(myATR,25,1))-1),0)*100
ge(Cup,Pds,0)+XAverage(Cdwn,Pds,0)+0.00001) atrUP=Round((myATR/(LowestBar(myATR,25,1))-1),0)*100
RS=RS*Mltp
Rate=MLTP1*(1+RS) Period=130
RSe = RSe[1] + Rate*(C-RSe[1]) Coef=0.2
RSEMA = RSe VCoef=2.5
End Function SmoPeriods=3
'----------------------------------------------------- MA=30
'INDICATOR PLOT
Sub RSEMA_IND(Periods, Pds, Mltp) theVFI=VFI2022(Period, Coef, VCoef,SmoPeriods, MA)
Dim RSe As BarArray VOLCONDITION=IFF((vixUP<VIXUPMAX Or
RSe = RSEMA(Periods, Pds, Mltp) atrUP<K*VIXUPMAX ) And theVFI>CRIT,1,0)
plot1(RSe)
End Sub If(Month(Date)>=10 Or Month(Date)<SELLMONTH) And (VOL-
'------------------------------------------------------ CONDITION[1]=1) Then Buy("LE",1,0,Market,Day)
—Richard Denning
info@TradersEdgeSystems.com SELLSEASONAL=IFF(Month(Date)=SELLMONTH,1,0) 'SEA-
SONAL Exit
for TradersStudio SELLVOLATILITY=IFF(vixUP>2*VIXUPMAX,1,0) 'VOLATILITY
Exit
AvgVFI=Round(Average(theVFI,10),0)
F TRADERSSTUDIO APRIL 2022 TRADERS’ theCross=IFF(CRIT>theVFI And CRIT<=theVFI[1],1,0)
AvgVFIdn=IFF(AvgVFI<AvgVFI[1],1,0)
TIPS CODE SELLMF=IFF(CRIT>theVFI And CRIT<=theVFI[1] And
An importable TradersStudio file based on AvgVFI<AvgVFI[1],1,0)
Markos Katsanos’ article in the April 2022 issue, “Stock
If SELLSEASONAL Then ExitLong("LXsea","",1,0,Market,Day)
Market Seasonality,” can be obtained on request via email to If SELLVOLATILITY=1 Then ExitLong("LXvola","",1,0,Market,Da
info@TradersEdgeSystems.com. The code is also available y)
on this magazine’s website. If SELLMF=1 Then ExitLong("LXmf","",1,0,Market,Day)
End Sub
Code for the Katsanos’ indicators is provided in following '--------------------------------------------------------------------------
files: Function VFI2022(Period, Coef, VCoef, SmoothingPeriods,
theMA)
'Period = 130
HSEASONAL_SYS: system code for the seasonal buy/ 'Coef = .2
'VCoef = 2.5
sell signals 'SmoothingPeriods = 3
Function VFI2022: computes the VFI indicator 'MA = 30
Dim TP As BarArray
Function ATR: computes the average true range Dim Inter As BarArray
Indicator plot VFI_IND: plots the VFI indicator on a Dim VInter As BarArray
Dim CutOff As BarArray
chart Dim VAve As BarArray
Dim VMax As BarArray
'Stock Market Seasonality
Dim theVC As BarArray
'Author: Markos Katsanos, TASC April 2022
Dim theMF As BarArray
'Coded by: Richard Denning, 2/12/2022
Dim DirVol As BarArray
Dim myVFI As BarArray
Sub HSEASONAL_sys(SELLMONTH,VIXUPMAX,CRIT,K)
Dim SumDV As BarArray
'SELLMONTH is 8.
'VIXUPMAX is 60.
TP = (H+L+C)/3
'CRIT is -20. !VFI SELL
If TP > 0 And TP[1] > 0 Then
'K is 1.5. !ATR/VIX RATIO
Inter = Log(TP) - Log(TP[1])
Dim VIX As BarArray
Else
Dim vixDN As BarArray
Inter = 0
Dim vixUP As BarArray
End If
Dim atrDN As BarArray
VInter = StdDev(Inter,theMA)
Dim atrUP As BarArray
CutOff = Coef * VInter * C
Dim myATR As BarArray
VAve = Average(V,Period)/1000
Dim theVFI As BarArray
VMax = VAve[1] * VCoef
Dim VOLCONDITION As BarArray
theVC = IIF(V/1000 < VMax , V/1000, VMax)
Dim SELLSEASONAL As BarArray
theMF = TP - TP[1]
Dim SELLVOLATILITY As BarArray
DirVol = IIF(theMF > CutOff, theVC, IIF(theMF < -CutOff,
Dim SELLMF As BarArray
-theVC, 0))
Dim AvgVFI As BarArray
Dim myVFI As BarArray
If VAve[1] <> 0 Then
Dim theCross As BarArray
Dim PosDV As BarArray
Dim AvgVFIdn As BarArray
Dim NegDV As BarArray
Dim Period,Coef,VCoef,SmoPeriods,MA
Dim SumDVpos As BarArray
Dim SumDVneg As BarArray
VIX = C Of independent1

PosDV = IIF(DirVol>0,DirVol,0)
NegDV = IIF(DirVol<0,DirVol,0)
SumDVpos = summation(PosDV/1000,Period)
SumDVneg = summation(NegDV/1000,Period)
SumDV = SumDVpos + SumDVneg
myVFI = SumDV / (VAve[1]/1000)
Else
myVFI = 0
End If
If SmoothingPeriods > 0 Then
myVFI = XAverage(myVFI, SmoothingPeriods)
Else
myVFI = myVFI
End If
VFI2022=Round(myVFI,2)
End Function
'-----------------------------------------------------------------------------
' AVERAGE TRUE RANGE
Function ATR(PriceH As BarArray,PriceL As BarArray,PriceC As
BarArray,ATRlen)
Dim TR As BarArray
TR = Max(PriceH - PriceL,Max(Abs(PriceC[1] - FIGURE 10: THE ZORRO PROJECT. This chart replicates the chart given in the
PriceL),Abs(PriceC[1]- PriceH))) article, “Relative Strength Moving Averages, Part 1: The RS EMA,” in the January
ATR = Average(TR,ATRlen) 2022 issue.
End Function
'-----------------------------------------------------------------------------
'INDICATOR PLOT
Sub VFI_IND(Period, Coef, VCoef, SmoothingPeriods, MA)
Dim theVFI As BarArray
theVFI = VFI2022(Period, Coef, VCoef, SmoothingPeriods, MA)
Plot1(theVFI)
Plot2(0)
'-------------------------------------------------------------
End Sub
—Richard Denning
info@TradersEdgeSystems.com
for TradersStudio
F T HE ZORRO PROJECT: MAY 2022 TRADERS’

TIPS CODE
In the March 2022 issue, we implemented the
volatility-adjusted relative strength moving average, which was
part 3 of the article series by Vitali Apirine titled “Relative FIGURE 11: THE ZORRO PROJECT. This shows the result from trading the RSE-
Strength Moving Averages.” This time, we will implement the MA-EMA crossovers with SPY on leverage 2, blue = RSEMA1 crossover equity
RS EMA based on part 1 of his article series, which appeared curve, gray = benchmark equity curve from SPY buy & hold.
in the January 2022 issue.

var RS = abs(EMAUp-EMADn)/
This task is to measure the relative strength of an EMA (EMAUp+EMADn+0.00001)*Mltp;
and use the result for the time period of another EMA. Here var Rate = 2./(Periods+1)*(RS+1);
is the algorithm from the article, reformulated for clarity: return EMA(priceC(),Rate);
}
RSEMA[0] = Alpha * Price + (1-Alpha) * RSEMA[1]
Adding 0.00001 to the divisor prevents a crash by division
This is a classical EMA, but with an RSI-dependent alpha by zero.
factor: The RSEMA1(10,10,10) applied to an SPX500 chart in
Figure 10 replicates the chart in the article.
Alpha = 2/(TimePeriod+1) * (1 + 10*abs(EMA(Gain)-EMA(Loss))/
(EMA(Gain)-EMA(Loss))) We can see that the 200-day RSEMA (blue) indeed cap-
tured the 2015–2016 corrections. This gives us hope that
EMA(Gain) is the 10-day EMA of positive returns and trading the RSEMA-EMA crossovers could produce a bet-
EMA(Loss) is the 10-day EMA of negative returns. The ter result than buy & hold. Here is the code for the trading
separation into positive and negative returns resembles the system:
RSI. The code converted from MetaStock to C is:
function run()
var RSEMA1(int Periods, int Pds, var Mltp) {
{ BarPeriod = 1440;
var Cup = max(RET(1),0), Cdn = max(-RET(1),0); LookBack = 250;
var EMAUp = EMA(Cup,Pds), EMADn = EMA(Cdn,Pds); StartDate = 2009;

EndDate = 2021; F EXCEL: MAY 2022 TRADERS’ TIPS CODE
asset("SPY");
In “Relative Strength Moving Averages, Part 1: The RS EMA”
vars RSEMAs = series(RSEMA1(200,200,10)); in the January 2022 issue, author Vitali Apirine walks us
vars EMAs = series(EMA(priceC(),200)); through the construction and features of RsEMA, the first of
if(crossOver(RSEMAs,EMAs))
enterLong();
his three approaches to using various relative strength measures
if(crossUnder(RSEMAs,EMAs)) toward improving on the basic EMA indicator.
exitLong(); Apirine notes that RsEMA, like the standard EMA, “…
plotBuyHold("SPY",GREY);
}
is a “trend-following, lagging indicator that responds more
quickly to price changes” than a standard EMA of the same
The result from trading the RSEMA-EMA crossovers length. So it may be used to identify turning points with a
with SPY on leverage 2, blue = RSEMA1 crossover equity bit less delay. He also notes that “in the absence of a strong
curve, gray = benchmark equity curve from SPY buy & hold trend, RsEMA-based strategies can produce lots of whip-
is shown in Figure 11. saws. So it should be used in conjunction with other indica-
Although the buy & hold benchmark generates higher end tors to help filter the whipsaw situations.”
profit, the RSEMA1 system appears to have smaller draw- Figure 12 replicates the chart in Figure 3 of Apirine’s ar-
downs. ticle using Excel. In the user controls area at the left, you
The RSEMA1 indicator and the SPY trading system can may specify the period lengths for two separate EMA cal-
be downloaded from the 2022 script repository on https://fi- culations and the parameters for two separate RsEMA cal-
nancial-hacker.com. The Zorro software can be downloaded culations.
from https://zorro-project.com. You select the mix and match of how they are to be dis-
—Petra Volkova played on the chart by clicking a combination of buttons in
The Zorro Project by oP group Germany the “clutter control” area to the right of the chart. The major
https://zorro-project.com decision is 1 or 2 (see Figure 13). You will achieve a price
Continued on page 55
FIGURE 12: EXCEL. This chart replicates Figure 3 from the article, “Relative Strength Moving Averages, Part 1: The RS EMA,” in the January 2022 issue.
FIGURE 13: EXCEL. This chart replicates Figure 5 from the article, “Relative Strength Moving Averages, Part 1: The RS EMA,” in the January 2022 issue.

Explore Your Options
GOT A QUESTION ABOUT OPTIONS?
Jay Kaeppel has over three decades of experience in the options markets. He
was a head trader for a CTA firm, an options trading software developer,
and was a portfolio manager for an investment management firm. He is
presently Senior Research Analyst for Sentimentrader.com. He is the author
of several books, including The Four Biggest Mistakes In Option Trading;
The Option Trader’s Guide To Probability, Volatility, And Timing; and
Seasonal Stock Market Trends. Send your questions or topic suggestions
to Jay Kaeppel at jay@sentimentrader.com. Selected questions will appear
in a future issue of S&C.
Jay Kaeppel
COVERED CALL STRATEGY is that you generate income equal to trader takes in $1,450 in premium
The covered call strategy is probably the premium amount received. That (10 calls × 100 shares × $1.45).
the second most popular options bad news is that doing so completely • If the options expire worthless,
trading strategy (second to simply caps your upside potential to the the trader keeps the entire $1,450
buying calls and puts). However, it is following: in premium. This represents a
also one of the most misunderstood return of 4.1% ($1,450 in premium
strategies. (Strike price + Premium / $34.98 × 1,000 shares) in just
Here’s a quick review of the covered received − Price of the 45 days.
call strategy: stock at the time of entry)
This sounds like—and is—an at-
• Writing a covered call involves tractive rate of return. However, the
The covered call is one
selling (or “writing”) a call option potential problem is that there is no
against shares of stock you hold.
of the most misunder- free lunch in trading. Selling 10 calls
• You receive a premium from stood strategies. against 1,000 shares of stock caps
the option buyer for writing the the upside profit potential at $1,470
covered call. For the sake of example: (35 strike price + $1.45 in premium
• Regardless of what happens to − $34.98 stock price × 1,000 shares).
the stock, the premium is yours • Let’s assume a trader holds 1,000 (See Figure 1.)
to keep. shares of Juniper Networks (JNPR), The tradeoff is quite clear in Figure
• However, if the stock rallies above trading at $34.98 a share. 1. As long as the stock doesn’t move
the call option’s strike price, the • Let’s say that on January 4, the too much in price before option expi-
option may be exercised, and the trader sells 10 Feb18 35 strike ration, this position can generate ad-
stock shares are called away from price calls @$1.45. ditional income and/or offset a certain
you at the strike price of the call • Each call is for 100 shares, so the amount of decline in the stock price
option.
• Conversely, if the stock price
declines more than the amount
received to write the covered call,
losses can accrue.
Let’s consider a “standard” covered

call strategy and then consider an
alternative approach.
OPTIONSANALYSIS.COM
The standard covered call

Most traders will sell one covered
call option for every 100 shares of
stock they own. This is a standard FIGURE 1: RISK CURVES, COVERED CALL (JNPR). Selling 10 calls against 1,000 shares of stock
covered call position. The good news caps the upside profit potential at $1,470.
Explore Your Options
($1.45 to be exact). However, if the
stock moves significantly higher, the
trader must choose between holding
on and letting the stock be called away
at $35 a share (possibly missing out
on larger gains) or buying back the
call options (potentially at a higher
price, that is, at a loss).
If the stock moves significantly
lower, the option premium received
can offset up to but no more than
$1.45 a share.
Let’s consider a simple alterna-
tive. FIGURE 2: RISK CURVES, COVERED CALL (JNPR). Shown here are the risk curves if the trader
this time sells only five covered calls instead of 10, as in Figure 1.
An alternative approach
to covered call writing The good news is two-fold. First, Summary
Nowhere is it written that a trader this still amounts to a 2.1% return There seems to be a fixation among
must write calls against their entire in 45 days—not bad if you can com- traders who write covered calls
stock position (assuming they hold pound at this rate. Second, and as with generating as much income as
more than 100 shares). So, a simple you can see in Figure 2, if the stock possible. However, the reality is that
alternative is to write less than the this is not a requirement and that
maximum number of calls you can selling less than the maximum al-
write. For our JNPR example, the Nowhere is it written lowable number of call options can
trader could sell anywhere from one that a trader must write allow for:
to 10 covered calls. Let’s consider the calls against their
risk curves if the trader sells only five entire stock position. • A still attractive level of income
covered calls instead of 10. generation
The risk curves for this position • Some downside protection
appear in Figure 2. rallies above the strike price of $35, • Unlimited profit potential
The bad news is that the trader only 500 shares can be called away. • Avoiding the regret of seeing all
receives only $725 in income. Thus, The trader will still retain the remain- shares called away just as a stock
the trader generates less income and ing 500 shares with unlimited profit begins a big up move.
has less downside protection. potential.
TRADERS’ TIPS this Traders’ Tip can be downloaded from Traders.com in

Continued from page 53 the Traders’ Tips area. To successfully download it, follow
these steps:
chart and then you choose which mix of indicators to display • Right-click on the link to the Excel file, then
in your chart arrangement. • Select “save target as” to place a copy of the spreadsheet
Figure 13 replicates the chart in Figure 5 of Apirine’s ar- file on your hard drive.
ticle using Excel. —Ron McAllister
On the Notes tab of this spreadsheet, I provide directions Excel and VBA programmer
for replicating the various charts that Apirine uses in his ar- rpmac_xltt@sprynet.com
ticle.
To download this spreadsheet: The spreadsheet file for
CMT ASSOCIATION 49TH ANNUAL Speakers are to include John Bol- trader, including
SYMPOSIUM linger, CMT, CFA, founder of Bol- chart reading,
The 2022 symposium by the CMT linger Capital Management; Buff moving aver-
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The theme is “Applying Technical Partners; Jeffrey Hirsch, chief mar- portfolio con-
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The event marks a return to a live Management; Gina Martin Adams, Kaufman shows
conference format since the start of CMT, CFA, global equity strategist how to iden-
the global pandemic. However, it will at Bloomberg Intelligence; Christo- tify price trends,
also be broadcast as a hybrid event pher Cain, CMT, quantitative equity which he con-
to allow virtual attendance for those strategist at Bloomberg Intelligence; siders the key to trading success. He
unable to attend in person. Helene Meisler, columnist for Real- then turns those chart patterns into
The symposium will bring together Money.com; Ernest Chan, PhD, trading signals. Moving averages,
an array of speakers across vari- managing member of QTS Capital swing trading, and short-term trad-
ous asset classes and arenas of the Management; and James Bianco, ing techniques follow, all presented
industry. Speakers will address key CMT. in careful detail. The author demon-
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active investment strategies and will members and nonmembers. Virtual how you can put them to use in your
provide takeaways that attendees can attendance is free for CMT mem- own trading. The crucial topic of risk
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data visualization methods, decision https://cmtassociation.org bilization, and other important risk
theory, machine learning algorithms, measures. These methods are used
and the forces at play when asset NEW BOOK: LEARN TO TRADE by professional traders but can be
prices and valuations diverge. Learn To Trade: Trade To Win With easily understood by nonprofessional
The symposium will explore first A Rule-Based Method by Perry J. traders as well.
principles of the markets and the Kaufman (2022, 425 pages, color Other recent books by Kaufman,
utility of technical analysis in any print and ebook) offers rules to follow who is a trader, financial engineer,
investment-selection model. Those that can make the difference between and former mathematician in the
who may benefit from attending uncertainty and confidence for the aerospace field, include Trading
include traders, analysts (both buy- trader. Insights shared in the book Systems And Methods, 6th edition
side and sell-side), portfolio manag- come from the author’s 50 years of (2020) and Kaufman Constructs
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wealth managers, asset allocators, and The book steps you through all the www.KaufmanSignals.com
quantitative system developers. essentials for becoming a successful
CALHOUN/MOMENTUM TRADE MANAGEMENT TIPS

Continued from page 28 In addition to providing you with a It relates to the
visual scanning approach, you can concept of signal to
INSIGHTS: WHY THIS also scale in to these charts as they noise.
TECHNIQUE WORKS trend higher. For long term 2–3 months
Ranges are key when trading break- swing trades, I like to add to winning
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strong wide-range green days show prices $2–$5 above my initial entry. interactive webinar site for active
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even higher. ing room for active traders. He is the
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FUTURES LIQUIDITY
T
rading liquidity is often over- very high volumes. The greatest number three-year period. Thus, all numbers in
looked as a key technical of dots indicates the greatest activity; this column have an equal dollar value.
measurement in the analysis futures with one or no dots show little Columns indicating percent margin
and selection of commodity activity and are therefore less desirable and effective percent margin provide
futures. The following explains how to for speculators. a helpful comparison for traders who
read the futures liquidity chart pub- Courtesy of CBOT wish to place their margin money ef-
lished by Technical Analysis of Stocks ficiently. The effective percent margin
& Commodities every month. is determined by dividing the margin
value ($) 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

Contracts to
Effective
Commodity Futures Exchange % Margin Trade for Equal Relative Contract Liquidity
% Margin
Dollar Profit
S&P 500 E-Mini (Jun ’22) CME 5.7 10.8 1 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>>>>>
10-Year T-Note (Jun ’22) CBOT 1.4 9.5 9 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
Ultra T-Bond (Jun ’22) CBOT 4.1 9.9 2 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
5-Year T-Note (Jun ’22) CBOT 1 9.7 14 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
30-Year T-Bond (Jun ’22) CBOT 2.6 8.7 4 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
Russell 2000 E-Mini (Jun ’22) CME 3.1 5.6 1 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
Nasdaq 100 E-Mini (Jun ’22) CME 6.1 10.9 1 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••
Crude Oil WTI (May ’22) NYMEX 12.6 9.1 1 •••••••••••••••••••••••••••••••••••••••••••••••••••••••
Ultra 10-Year T-Note (Jun ’22) CBOT 2 9.9 6 •••••••••••••••••••••••••••••••••••••••••••••••••
Gold (Jun ’22) COMEX 4.1 12.1 3 •••••••••••••••••••••••••••••••••••
2-Year T-Note (Jun ’22) CBOT 0.4 9.8 18 •••••••••••••••••••••••••••••••••
Soybean (May ’22) CBOT 2.8 5.4 2 ••••••••••••••••••••••••
Soybean Meal (May ’22) CBOT 1 2.5 2 ••••••••••••••••
Euro FX (Jun ’22) CME 1.9 17.1 11 •••••••••••••
Corn (May ’22) CBOT 7.3 12.4 8 ••••••••••••
3-Month Eurodollar (Dec ’22) CME 0.2 7.5 26 •••••••••••
Gasoline RBOB (May ’22) NYMEX 9.8 11.2 1 •••••••••••
Natural Gas (May ’22) NYMEX 10.2 14 4 •••••••••
Silver (May ’22) COMEX 8.4 15.9 3 •••••••
Dow Futures Mini (Jun ’22) CBOT 5.3 10.9 2 ••••••
High Grade Copper (May ’22) COMEX 6 10.6 3 ••••••
Japanese Yen (Jun ’22) CME 2.7 12.7 8 ••••••
S&P 500 VIX (Apr ’22) CFE 49.6 18.5 3 ••••••
ULSD NY Harbor (May ’22) NYMEX 13.1 15.7 1 •••••
30-Day Fed Funds (Apr ’22) CBOT 0.1 4.7 20 ••••
Australian Dollar (Jun ’22) CME 2.4 9.1 9 •••
Cotton #2 (May ’22) ICE/US 5.6 8.7 4 •••
Sugar #11 (May ’22) ICE/US 6.9 13.1 15 •••
Wheat (May ’22) CBOT 14.5 24.6 6 •••
British Pound (Jun ’22) CME 2.9 22.8 17 ••
Canadian Dollar (Jun ’22) CME 1.9 12.5 14 ••
Coffee (May ’22) ICE/US 12.2 20.4 4 •• CBOT Chicago Board of Trade, Division of CME
Crude Oil Brent (F) (Jun ’22) NYMEX 12.7 14.9 2 •• CFE CBOE Futures Exchange
Hard Red Wheat (May ’22) KCBT 14.2 21.9 5 •• CME Chicago Mercantile Exchange
Lean Hogs (Jun ’22) CME 4.2 6 5 •• COMEX Commodity Exchange, Inc. CME Group
Live Cattle (Jun ’22) CME 2.8 6.8 8 •• ICE-EU Intercontinental Exchange-Futures - Europe
Ether Micro (Apr ’22) CME 0.1 0.2 3 • ICE-US Intercontinental Exchange-Futures - US
Mexican Peso (Jun ’22) CME 5.8 25.6 31 • KCBT Kansas City Board of Trade
Platinum (Jul ’22) NYMEX 8.9 20.7 8 • MGEX Minneapolis Grain Exchange
Bitcoin Micro (Apr ’22) CME 32.3 68.6 76 NYMEX New York Mercantile Exchange

Brazilian Real (Apr ’22) CME 5.8 20.6 29
2205
Butter Cash-Settled (Apr ’22) CME 4 7 5
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).

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TRADERS'
RESOURCE
TOP 10 VIEWED advisory services FOR TRADERS

LINKS
Advisory services are all over the place, as our
Service Company
listing at Traders.com shows. You have plenty
of choices and price points to consider. 1. John Murphy’s Market Message StockCharts.com, Inc.
One key factor is whether the outfit you’re
checking out is a Registered Investment Advi- 2. Lowry’s Market Trend Analysis Lowry Research Corporation
(Daily)
sor (RIA) or a registered Commodity Trading
Advisor (CTA). Though it doesn’t weed out the 3. Top Guns Trading Online Investment Services, LP
undependable advice, the act of registration puts the person or 4. Real time trading signals E-mini Daytraders Bulletin
persons under the government’s scrutiny. In this listing, filled in S&P 500
by the companies themselves, you’ll find those who have RIA 5. HotCandlestick, Daily Candlestick HotCandlestick.com, LLC
and/or CTA certifications as well as those who are nonregistered Chart Analysis
advisories. 6. Millennium-Traders.Com Millennium-Traders.Com
If it’s trading advice you seek, then track records are essential,
preferably records monitored by third parties. References should 7. indexArb indexArb
also be checked, and if publications are involved, back issues should
8. technical analysis of markets, John Magee Technical
be scanned. Even then, a lengthy observation period following on the web Analysis::delphic OR ltd
the advisor’s rationale and recommendations is prudent. Commit
money to trades only when you are ready to follow the advice 9. daytradespy.com daytradespy
thoroughly: You’ll only have yourself to blame if you cherry-pick
10. Investors Intelligence Chartcraft InvestorsIntelligence.com
trades and come up with results differing from the advisor’s.
Our listing may include other types of products that are not These are the 10 Advisory Services clicked on most often on the Traders’
strictly advisories but may provide advice or recommendations, Resource website, in order of clicks received. This is not an editorial rating or
such as newsletters, commentary, hotlines, and educational ser- ranking. For more information on specific products and services, try checking
vices. The listing is only a sample of products that are offered. store.Traders.com for archived S&C product reviews.
For more complete information, see the Traders’ Resource area
at our website, Traders.com. categories, such as data services, seminars, hardware, software,
and trading systems. Just click on the Traders’ Resource link.
TRADERS’ RESOURCE AT TRADERS.COM Then follow the Advisory Services category link, or use the search
Traders’ Resource is available at our website where you’ll not feature to find products or services with specific attributes in this
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The information in Traders’ Resource is the most accurate at the time of posting and is subject to change. Because the vendors posting to Traders’ Resource are responsible for their own listing, Technical Analysis, Inc. declines any and all
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Trading Perspectives
SOME PERSPECTIVES ON THE EQUITIES WORLD

Rob Friesen is a professional trader and president & COO of Bright Trading
(www.stocktrading.com), a proprietary trading firm hosting independent
trader/members, an online trading school, and utilizing the StockOdds
database (www.mystockodds.com). This column shares his thoughts and
outlooks on trading, locating opportunity, probabilistic outcome, and
maintaining perspective throughout industry changes. He can be reached
at robfriesen@brighttrading.pro or via stocktrading.com.
Rob Friesen
ODDS & ENDS $4.00 from June 2021 through to become strained
This month, I wanted to do something the beginning of January, where it • stocks can move more than we
a bit different by offering a collection started to lift off and trend upwards. might think or have allowed
of thoughts, observations, and items With the range breakout, volatility for
that I believe are important to share. increased. Recently, the ATR has • elevated ATRs can indicate a
Certainly, some of the points could increased further. On Friday, March “story stock” and we don’t know
be expanded on in greater detail than 18, 2022, CALM’s price action tagged the whole story
what is presented here. the 5-year high and broke above that
by two cents intraday. With this elevated volatility, we can
Volatility The expansion of ATRs can create three scenarios and assign
Volatility is a two-way street. This increase a trader’s potential to profit probabilities to each:
means that it swings both ways… in the following ways:
and what may look like a trend can 1. CALM breaks upward and
be short-lived, and reversals can through its 5-year range with
catch traders off-guard. One practi- Options can exert a significant expansion
cal way to adjust to it is to monitor tractor beam-like force 2. CALM stays the same hover-
the expansion/contraction of ATRs upon the underlying due ing around Friday’s close of
(average true range). $51.75
to the open interest.
From the StockOdds database, 3. CALM moves lower by a few
let’s look at the Cal-Maine Foods, ATRs.
Inc. (stock symbol: CALM), which • increased directional move-
is anything but calm lately (Figure ment I would assign a low probability to
1). This stock has traded in a roughly • repeated opportunities for pro- item #2, as elevated ATR along with
$15.00 range over the last five years. duction (more trades) the 5-day move from 43.35 to 51.75
The year 2021 saw the ATR average • distinct “V”-type reversals places the signal-to-noise ratio as
$1.03 per day. I like to compare the • can challenge support and high. With a high signal, we will
ratio of the five-day ATR to the an- reversal with more vigor, pro- either see a smashing of resistance or
nual average to evaluate short-term viding informative feedback a sharp turn back down, but typical
volatility versus a longer-term per- to traders price action after 5-day momentum
spective. This puts current volatility • greater return per dollar in with expanded ATRs suggests
at 2.15 times the annual. play anything but “calm trading” in the
I also monitor 5-day ATR versus the days following.
standard 14-day ATR, the timeframe Increasing ATRs can also present Going back again to StockOdds
utilized by the developer of the ATR risk: database, and utilizing the momentum
indicator, J. Welles Wilder. As of the (3-period) signal, which measures the
close of trading on March 18, 2022, • price action can reverse sud- rate of change in stock prices, we
the 5-day to 14-day ratio is 1.39. The denly and violently observe that there was only one other
5-day ATR is 2.21 and the 14-day • increased risk for overnight time in the past 8 years that CALM
ATR is 1.59. The stock had been holdings and swing trades had a move of this magnitude, which
in a tight trading range of roughly • peer relationships and pairs can occurred on November 14, 2016 and
ESIGNAL
FIGURE 1: CALM (DAILY CHART, UP TO MARCH 18 CLOSE). Here you can see the change from quieter months to the breakout and rise in ATR.
the subsequent performance was if-then statements can be created to as our if-then statements can still be
−4.06% the next day open to close. either participate in the continuation drawn up. We can include in these
Thus, only one sample exists and up through resistance, or move lower scenarios:
therefore we don’t have a Sharpe ratio in keeping with what happened in
or any other datapoints. This puts the 2016. Screening by other signals • Did the stock have any volume
stock action more in the category such as RSI, Connors, %BB, %R, or price action in the extended
of “price discovery” versus a large and stochastics, we observe more hours session on Friday, or pre-
sample of predictable behavior. samples, but a general “on the fence” market on Monday?
That being said, a trader can still subsequent outcome, meaning no real • Is there an indication of where
use this, as they know that CALM indication of up or down behavior it is opening relative to Friday’s
hit resistance on Friday and the stock from where the stock closed on close, the pivot, or the five-year
may retrace on Monday. A variety of Friday. Again, that is not concerning, high?
FIGURE 2: CALM (1-MINUTE CHART, MARCH 16 AND 17). This illustrates the volatility reversals or “V” moves that you can have on declines or on
rallies. As ATRs increase, this action becomes more frequent.
• Plan for opening range break- to VWAP at 10:40 am ET. It closed jump on stocks that are going up, as
out in relationship to those the day session at $351.49 with the they feel anxious that they will miss
datapoints. last 30 minutes of the trading day’s the opportunity to gain, only to find
price action jostling above and below that after they buy, the stock drops,
As mentioned earlier, with the $351.00, which is related to the strike and they get shaken out or have to
high ATR values, we can anticipate price of noteworthy put and call open stop-loss the trade.
a directional move, rather than interest. A couple of things can help with
insignificant and benign sideways I have studied this behavior with this:
chop. very liquid stocks and ETFs more so
with monthly option expirations than • Data-driven trading
Maximum pain: option expira- weekly options. • If-then scenario planning
tions
Options can exert a tractor beam-like Expiration & other events We need to rely on data. But here is
force upon the underlying due to the It is important to note that expira- where the probabilities come into
open interest. tion should be treated as an “event.” play. Using data does not provide
Heading into expiration week, Think of it similar to a stock paying guarantees; it helps with providing
the strike prices on the NASDAQ a dividend. There may be a move up probabilities for the future. To help
100 ETF (QQQ) were of particular in a stock prior to the ex-dividend with emotions, utilize data and
interest, especially those from date, and a completely different price planning. Many pair traders and
345–355. As the market jumped action after. The same can be true for basket traders plan all their trades
and pushed higher on March 16, prior to the “price action” of the day,
the strike of 351 firmed up as a key Volatility is a two- which is the point where the trader
target (note: open interest at various is susceptible to being influenced
levels is fluid).
way street. What may and can react or overreact. They
Maximum pain theory is contro- look like a trend can have learned that reacting is not a
versial in what causes the move of the be short-lived, and planned response and is often the
underlying stock; is it chance, hive reversals can catch wrong course of action.
sentience, “the Borg collective,” or traders off guard.
market manipulation? Indicators
Regardless of the reasons, it is the market indexes related to expira- Better than just using lagging indica-
something to watch for and can add tion events. Planning for the potential tors and deciding from those signals,
weight to decision-making when and of a reversal or continuation for the what if you knew the subsequent
if you see the tractor beam in play. As day/week following can be done us- “odds” and direction of price action
we came into expiration morning, the ing the if-then scenario planning we after a signal, which has been ana-
351 strike was pegged with the largest utilized with CALM. lyzed from a large sample of data
open interest of puts and calls. If we apply this to the QQQ, we points. You would need data, which
“Maximum pain” is defined as the would be looking for a potential is information, knowledge on what
closing of the stock at the strike price reversal after rallying up to the max- to do with the data, and wisdom in
that would cause the most options that pain strike price. Once the “event” is vetting any symbols due to news,
were purchased to expire worthless. over, there is not that tractor-beam macro influences, mergers, dividends,
This would allow option writers influence. and more. Wisdom is also required in
(sellers) to keep the income from capital management, position sizing,
the sales, and for hedgers not to be Psychology type of hedging, timeframes, and if-
disrupted in their hedging models. So There is a human tendency to over- then scenario planning.
the stock price may target this strike weight the present price action, as Regarding the CALM and QQQ
price closing at or fairly near it. well as be influenced by the news, symbols, I encourage you to look
On Friday, QQQ moved in a fairly talking heads, and the consensus, back at your charts and observe the
orderly fashion, hugging the upper and as a result, wrong decisions can price action that occurred before and
Bollinger Band for most of the day. be made. It is much more difficult to after the “events.”
It opened at 342.33 and moved up develop critical and alternative think-
immediately with only one pullback ing. Traders have told me they often
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4 • May 2022 • Technical Analysis of Stocks & Commodities

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