2021 Nov

THE TRADERS’ MAGAZINE SINCE 1982
www.traders.com NOVEMBER 2021
CONVERTIBLE POINT
& FIGURE CHARTS
Introducing OXXO charts 8
SHOULD YOU BUY

NEW 52-WEEK HIGHS?
How bullish is it? 18
BUY THE OPEN,

SELL THE CLOSE
Avoid getting shaken out 23
THE MAD INDICATOR,

ENHANCED
How the MADH is created and
how you can put it to use 24
INTERVIEW
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CONTENTS NOVEMBER 2021, VOLUME 39 NUMBER 12
6 Explore Your Options

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

editor@traders.com 8 Charting Breakouts With
Editor in Chief Jack K. Hutson Convertible Point & Figure Charts
Production Manager Karen E. Wasserman by Tushar S. Chande, PhD
Art Director Christine Morrison Here, we introduce a charting staple for technicians and market
Graphic Designer Wayne Shaw technique that builds on the classic analysts. Stocks & Commodities
Webmaster Han J. Kim point & figure charting style and Contributing Writer Leslie
Contributing Editors John Ehlers, updates it to put the time dimension Masonson interviewed him to ask
Anthony W. Warren, PhD. into play. about his two financial newsletters,
Contributing Writers Thomas Bulkowski, Martin Pring, his stage analysis concept, and to
Barbara Star, Markos Katsanos, Leslie N. Masonson,
Karl Montevirgen 18 Should You Buy New glean some market wisdoms from
52-Week Highs? his long investing career.
OFFICE OF THE PUBLISHER by Pawel Kosinski
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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
IT’S YOUR CALL: DECIDING WHICH in the price of a given underlying se- the best strike price to buy given your
STRIKE PRICE TO BUY curity. However, as you have already own expectations and willingness to
I am brand new to options trading. surmised, the strike price (and the assume risk?”
I want to buy call options, but I am expiration month) that you choose can For example, if you have made the
unsure which strike price to buy, and will have a profound impact on decision that you are super bullish on
in-the-money, at-the-money, or out- your eventual success or failure. a given stock and that your goal is to
of-the-money. Is there a way to tell There is no definitive answer to the enter a position that will maximize
which one is best? question, “which is the best strike your profitability if you are correct,
Buying a call option gives you the price to buy?” The closest we can get then an out-of-the-money call may
potential to profit from an increase is to answer the question, “which is be the best choice, as it will offer the
most profit potential. On the flip side,
it will also hold the highest likelihood
of expiring worthless.
The key considerations are con-
veyed using the Greek terms “delta”
and “theta.” In English, we are talking
about an option’s “responsiveness” to
price movements by the underlying
OPTIONSANALYSIS.COM
stock and about “time decay”—that is,

the fact that every option will lose all
of its time premium by expiration.
FIGURE 1: AAPL OPTIONS, 56 DAYS LEFT UNTIL EXPIRATION. The strike prices within 10% of To illustrate these concepts, we
the stock price can be seen for option calls on Apple, along with values for delta, theta, and other
greek variables and metrics. will focus on one expiration month
for options on Apple (ticker AAPL)
that has 56 days left until expiration.
The strike prices within 10% of the
stock price appear in Figure 1.
For our purposes, we will refer
to the:
• 135 strike price call as “in-the-

money” (ITM)
• 150 strike price call as “at-the-
money” (ATM)
• 160 strike price call as “out-of-
the-money” (OTM)
FIGURE 2: RISK CURVE FOR 135 STRIKE PRICE. This shows the risk curve for holding one call
on AAPL with a 135 strike price. The breakeven price at expiration is $150.13 (135 strike price plus Let’s consider these options one at
$15.13 option price). a time.
The risk curve for holding one 135
strike price call appears in Figure
2. Note that the breakeven price at
expiration is $150.13 (135 strike price
plus $15.13 option price).
At-the-money (the 150 call):

• The cost to buy this call is 4.85, or
$4.85 × 100 shares = $485
• Has a “delta” of 47.04. This tells us
that if AAPL stock rises in price
by $1, this call will increase in
value by roughly $47.04
FIGURE 3: RISK CURVE FOR 150 STRIKE PRICE. This shows the risk curve for holding one call
on AAPL at the 150 strike price. The breakeven price at expiration is $154.85 (150 strike price plus
• Has a “theta” of −0.0508. This
$4.85 option price). tells us that based solely on the
passage of one day’s time, this
option will lose $5.08 of value
(−0.0508 × 100 shares)

Out-of-the-money (the 160 call):

• The cost to buy this call is 1.65, or
$1.65 × 100 shares = $165
FIGURE 4: RISK CURVE FOR 160 STRIKE PRICE. This shows the risk curve for holding one call • Has a “delta” of 21.91. This tells us
on AAPL at the 160 strike price. The breakeven price at expiration is $161.65 (160 strike price plus
$1.65 option price). that if AAPL stock rises in price
by $1, this call will increase in
value by roughly $21.91
• Has a “theta” of −0.0365. This
tells us that based solely on the
passage of one day’s time, this
option will lose $3.65 of value
(−0.0365 × 100 shares)

FIGURE 5: RISK CURVES OVERLAID FOR DIRECT COMPARISON. Here, the risk curves are shown
for both the in-the-money (135 strike) and out-of-the-money (160 strike) options.
Comparing positions
In-the-money (the 135 call): value by roughly $80.93 One of the best ways to understand
• The cost to buy this call is 15.13, • Has a “theta” of −0.0419. This the differences between two positions
or $15.13 × 100 shares = $1,513 tells us that based solely on the is to draw their risk curves on the
• Has a “delta” of 80.93. This tells us passage of one day’s time, this same chart. Figure 5 displays the risk
that if AAPL stock rises in price option will lose $4.19 of value
by $1, this call will increase in (−0.0419 × 100 shares) Continued on page 39
November 2021 • Technical Analysis of Stocks & Commodities • 7
NEW CHARTING TECHNIQUES
Introducing OXXO Charts
Charting Breakouts With

Convertible Point & Figure Charts
Here, we introduce a charting technique that builds on chart only plots closing prices, a reversal is defined
the classic point & figure charting style and updates as a move of a specified amplitude in the opposite
it to put the time dimension into play. direction from the most recent extreme in the closing
T
price, for example, P&F charts reverse at a trailing
raditional point & figure charts, which use stop. We can describe P&F chart construction rules
the letters “X” and “O” to denote uptrends in a simplified way as follows:
and downtrends, are time-independent charts
because they plot changes in price movement 1. Use only closing prices.
without a time axis. This “timelessness” is both a 2. Define the minimum price range “width” or “box”
strength and a weakness. for filtering or condensing price ranges (“w”).
Wouldn’t it be helpful if we could seamlessly toggle 3. Define the width (“W”) of the reversal band as
between timeless and time-dependent charts? W = 4w.
Here, I’ll introduce a way you can do just that. I call 4. Calculate the x-day highest close (HC) and low-
this charting technique convertible timeless charts, est close (LC).
or “OXXO charts” for short. 5. An upside reversal occurs at LC + W.
In this article, I will demonstrate how to build 6. A downside reversal occurs as HC − W.
OXXO charts using a breakout indicator such as a 7. For every reversal, advance the plot one column
price channel or price band. The ability to toggle along the horizontal axis.
back and forth effortlessly between timeless and time- 8. Mark closing prices only within a “box,” that is,
based charts makes convertible timeless charts a vital condense and filter price move into boxes.
advance over traditional point & figure charts.
There can be many other refinements, but the
Point & figure charts: A review fundamental concepts behind P&F charts are the
The most common stock chart has two linear axes: a rule to advance along the horizontal axis (for each
vertical axis for prices and a horizontal axis for time. reversal in direction), an algorithm for defining price
If we eliminate time from consideration, we can only reversals (“bands”), and condensing or filtering price
plot a line parallel to the vertical axis, since we have moves into a range of prices (“box”).
no rule for advancing the plot along the horizontal P&F charts have significant limitations. First, since
axis. Point & figure (P&F) charts solve this puzzle they do not have a time component, backtesting is
by focusing on price swings and advancing the plot complex, and we cannot apply the usual technical
one unit along the horizontal axis for each change in analysis indicators. Second, the vertical axis is not
direction. Hence, we get alternating segments parallel uniform, and this can distort the perspective, giving
to the vertical axis, with each fragment moving in a a false sense of continuity. Third, the reversal occurs
direction opposite to the previous one. quite far away from the most recent plot, but since the
P&F charts must define a reversal criterion to intervening gaps are filled when plotting a new column,
LISA HANEY
detect a change in direction. For simplicity, if a P&F the reversal levels seem closer to price extremes.
by Tushar S. Chande, PhD

Fourth, the reversal levels often cross
over so that the upside reversal level
can be below the downside reversal
level and vice versa, causing peculiar
side effects. Fifth, the ideal box size
is difficult to define, particularly over
extended periods in which the stock
or index has had enormous gains or
swings.
Given the simplified P&F chart
construction rules, we can now quickly
develop other variants. First, we can
change the rule for how to advance
a step along the horizontal axis. For
example, you could move forward for
each new high (or low) at least one box
width beyond the most recent high (or
price low). So a series of new highs
or lows would produce a diagonal FIGURE 1: PRICE CHANNEL AND REVERSAL BANDS. This shows the trailing stops or reversal bands
line (not just a vertical trace), as with needed to construct a 50-point box P&F chart for the S&P 500 index.
renko charts.
Second, we can specify many
different algorithms for breakout
levels, visualizing P&F charts as
timeless breakout charts. For example,
we can set the breakout level using
a price channel or bands around a
moving average (percent, standard
deviation, ATR, or high-low range).
The advantage of these definitions
is that the upside breakout barrier is
always above the downside breakout
barrier, and the bandwidth can be as
broad or adaptive as you want.
Deconstructing a
P&F chart
I will add time back into a P&F chart
to show how we can go back and forth
between a P&F chart and a standard FIGURE 2: AN ILLUSTRATION OF POINT & FIGURE CONSTRUCTION RULES. A penetration of the
solid green and red reversal bands (from Figure 1) advances the P&F chart plot one column along the
price chart. I will use the S&P 500 horizontal axis. The dashed green and red lines plotted in the lower panel flag the start and end of P&F
index daily data from 12/31/2019 chart columns along the time axis. The red and green arrows highlight the penetration of the reversal
through 6/30/2021 to simulate the bands that causes a new column to form on a P&F chart.
construction of a P&F chart with a
50-point box (w = 50). In Figure 1, I show the daily closes two lines were very close together.
along with the 20-day highest close (HC) and lowest close I can now plot the reversal rules in Figure 1. When prices
(LC) price channel (dashed lines) along with the implied close below the red line, we construct a down column in
reversal band (HC-200 solid red line; LC + 200 solid the P&F chart, and when prices close above the green line,
green line). Observe that during the February–March 2020 we shift over one column and construct a rising column on
selloff, the upside reversal band (green line) was below the P&F chart. In Figure 2, the dashed green line shows
the down reversal line (red), and in May–June 2020, the the reversals across the solid green line (rising column in
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P&F chart), and the dashed red line
shows the reversals across the solid
red line (falling column in P&F chart).
Figure 3 shows the P&F chart implied
by Figure 2, and in Figure 4, I show the
P&F chart drawn with more elaborate
rules (from TradingView.com) for
comparison. Note the substantial
similarity between the solid green and
red columns in Figure 3 and the rising
and falling columns in Figure 4.
Rules for OXXO convert-

ible timeless charts
Figures 1 through 4 show that P&F
charts are essentially timeless break-
out charts. Building on this idea, we
can now return to the initial rules and
generalize them as follows: Instead of FIGURE 3: POINT & FIGURE CHART DECONSTRUCTED. The P&F chart implied by the construction
rules from Figure 2 is shown. The gaps in the daily closes have not been filled in for effect. The gaps
reversal at trailing stops from the high- after each reversal are also not closed to show the distance to the reversal.
est high and lowest low close, we will
use a price channel or a price band built
around some moving average. This ap-
proach automatically guarantees that
the reversal lines do not cross each
other. We will continue to advance
one column for each reversal as before,
using closing prices. So the new rules
for OXXO charts look like this:
1. Use daily closes

2. Define the centerline (CL) of the
breakout levels as follows:
a. from the midpoint of price
channels, or
TRADINGVIEW.COM, HTTPS://WWW.TRADINGVIEW.COM/X/NBQWJ9ZE
b. from moving averages (sim-
ple, exponential, adaptive,
or other moving average)
3. Define the width W of the reversal
window as follows:
a. via some measure of price
range or volatility (for ex-
ample, average true range,
standard deviation, high-
low range, or any other
measure of price range) FIGURE 4: TRADITIONAL POINT & FIGURE CHART. Compare the rising and falling lines in 2020 to
b. half the width of the price the dashed green and red lines in Figures 2 and 3.
channel
c. some percentage above and below the moving that is, we could have WL for a long reversal
average or midpoint of the price channel and WS for a short reversal
d. the width W does not have to be symmetric; 4. Construct the reversal levels as CL +/− W (or CL +
WL, CL − WS)
5. Define the pattern to recognize
the reversal:
a. single close beyond the
reversal level
b. multiple closes beyond the
reversal level
c. one or more highs (or lows)
beyond the price level
d. moving average beyond the
reversal levels
e. any other indicator beyond
the breakout level
6. For each reversal, advance the
plot one column along the hori-
zontal axis
7. Plot each close without trying to
fill any gaps or reversals
8. We can add additional rules for
FIGURE 5: PRICE CHANNEL. A standard 20-day price channel is plotted with a one-day delay using
advancing a column in the style only the daily closes of the S&P 500 index.
of renko charts as follows:
a. For each x% advance (or
decline) in closes during
the breakout, advance one
column
b. For each y% countertrend
move (without a reversal),
advance one column.
For completeness, note that an

approach such as Wilder’s parabolic
stop & reverse (SAR) can also be
used, because the trailing stops do
not intersect. Even though we have
written the rules using only closing
prices for convenience, the rules can
also be redone using high and low
prices, or in other time periods, such
as weekly data.
Here is one way to implement the FIGURE 6: THE OXXO REVERSAL RULES ARE OVERLAID ON THE PRICE CHANNEL BREAKOUT.
new rules using price channels. Figure An upside reversal occurs for a close above the upper dashed green line. The downside reversal occurs
on a close below the lower dashed red line.
5 shows a standard 20-day price
channel using daily closes of the S&P
500 index. The breakout levels are always “correctly”
separated, with the upside breakout level always above the
downside breakout level. So a close below the dashed red We can specify many different
line of the lower price channel would start a new falling algorithms for breakout levels,
or bearish column on an OXXO. Similarly, a close above visualizing P&F charts as
the dashed green line of the upper channel would shift timeless breakout charts.
the OXXO chart forward one column and start a bullish
column. I have explicitly shown the decision rule in Figure
FIGURE 7: OXXO CHART, 20-DAY PRICE CHAN- FIGURE 8: CONVERSION TO A TIMELESS CHART. This shows S&P 500 daily closes with 50-day
NEL OF DAILY CLOSES. The timeless breakout simple moving average and 3% bands around that average. A close above the upper band or below
chart is implied by the 20-day price channel from the lower band defines a reversal. The dashed green and red lines show the reversal to rising or falling
Figures 5 and 6. columns in the corresponding timeless chart (Figure 9).
6. The OXXO chart implied by Figures

5 and 6 is shown in Figure 7.
Figure 8 shows an OXXO chart using
3% bands around a 50-day simple
moving average for the S&P 500 from
December 2019 through June 2021 to
illustrate its conversion into a timeless
chart. The corresponding OXXO
chart for breakouts using the 50-day
average and 3% bands is in Figure 9,
but it started in 2015. The long-term
resistance around 3000 is plainly
evident, as it would be for a P&F chart.
Since the 3% bands around the 50-day
moving average can be quite wide, the
upside reversal can come “very late,”
and that is visible in the gap between
the March 2020 low and the next
upside breakout green bar.
As we shorten the SMA length FIGURE 9: OXXO CHART, MAY 2015–JUNE 2021. This OXXO breakout chart is derived from a price
and narrow the bandwidth, we will chart that uses 3% bands around the 50-day simple moving average on the S&P 500 index such as the
get more reversals, as you can see by one in Figure 8, except that this OXXO chart represents the period from May 2015 through June 2021.
The long-term resistance around 3000 is plainly evident, as it would be for a P&F chart. Since the 3%
using a 20-day simple moving average bands around the 50-day moving average can be quite wide, the upside reversal can come “very late,”
and one standard deviation Bollinger and that is visible in the gap between the March 2020 low and the next upside breakout green bar.
Bands (see Figure 10). Nevertheless,
the overall similarities between Figures 9 and 10 are We can also include the renko adaptation in this chart.
apparent, even though Figure 9 has fewer reversals than The renko chart adds a column every time the price goes
Figure 10. up by a fixed amount during uptrends or downtrends. I
Thrive With AbleTrend
took the 3% bands around the 50-day Buy on Blue and Sell on Red
simple moving average as the breakout
detector (as in Figures 8 and 9) and
added the renko adaptation by bumping AbleTrend Proprietary Caluations
out the column for each 1% increase Reveal when Everything is Aligned to
(or decrease) in prices during ascent or Sell Oﬀ
descents. During reversals, I bumped
out a column for each 4% reversal. The
Calculated in Real-time
resultant graph gives a better insight Help you Catch the Big Trend
into price moves within a timeless
chart (see Figure 11). Significant gaps Real-time Intraday Signals
in prices are deliberately not filled in Shows you Where to Buy or Sell
& When to Hold vs When to Get out
to provide a better sense of the price
action, and reversals are rendered in Stopped out
purple to highlight them. Gain of $2,500/Contract
Advantages of convertible
timeless breakout charts
This approach to constructing con-
vertible timeless breakout charts (see
Figures 5–7) has many advantages since
there is a direct connection between the Triple Confirmed Buy/Sell Signals
timeless and time-dependent breakout
charts. Advantages include:
• We can focus on the overall trend Traders Rave Over AbleTrend

evolution by just focusing on the
timeless chart (see Figures 7–9).
• Any testing that your breakout
ABLETREND 7.0 COLLECTED BY
strategy needs can be done as SINCE 1994
usual so you can select parameters

that meet your goals.
• Users can set any desired trail-
ing stops as usual on the charts
with the time component (see
Figure 6).
• You can get creative in how you
construct the breakout channels
or bands, more so than you could
with a P&F chart.
TEST DRIVE THE LATEST SIGNALS

You can get as creative
as you want in defining
your breakout criterion or THESE RESULTS ARE BASED ON SIMULATED OR HYPOTHETICAL PERFORMANCE RESULTS THAT HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE THE RESULTS
criteria, so the OXXO can 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
be quite different than 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
SHOWN. THE TESTIMONIAL MAY NOT BE REPRESENTATIVE OF THE EXPERIENCE OF OTHER CLIENTS AND THE TESTIMONIAL IS NO GUARANTEE OF FUTURE
the usual P&F chart. PERFORMANCE OR SUCCESS. TECHNICAL ANALYSIS OF STOCKS & COMMODITIES LOGO AND AWARD ARE TRADEMARKS OF TECHNICAL ANALYSIS, INC.

• By leaving the gaps in place,
you can see gaps in the price
action as well as the gaps in the
reversals from long to short or
vice versa.
• This approach preserves a key
benefit of P&F charts—being able
to see key support and resistance
levels.
• You can get as creative as you
want in defining your break-
out criterion or criteria, so the
OXXO can be quite different
than the usual P&F chart. For
example, you may use two closes
beyond a price band to confirm
a breakout.
• The upside reversal bands are
guaranteed to be above the FIGURE 10: OXXO CHART USING SHORTER SMA LENGTH AND NARROWER BANDWIDTH. This
downside reversal bands. example OXXO chart uses 1-sigma Bollinger Bands around a 20-day simple moving average. As
• You can toggle between the time- expected, there are more reversals. Critical breakout levels are also easy to see.
less and time-dependent charts
as you please to combine the two
approaches.
• You can apply any other type of
reversal algorithms, such as the
parabolic stop & reverse.
Tushar Chande is the creator of many

popular technical indicators such
as the first adaptive moving average
(VIDYA), stochRSI, Aroon, Chande
Trend Meter, and many others. His
indicators are available on virtually
all major technical analysis platforms.
You can use his latest indicators and
read his blog at chandeindicators.
com or at chandeindicators.substack.
com.
Further reading FIGURE 11: RENKO EXTENSION ON OXXO CHART. The renko extension to the OXXO chart gives a
Chande, Tushar S. [2008]. Beyond clearer picture of the evolution of price extensions and reversals when compared to Figure 9. A +3%
Technical Analysis: How to De- band around the 50-day simple moving average (SMA) of the closes was used to generate the OXXO
chart, with 1% trend and 4% reversal limits for the renko extension.
velop and Implement a Winning
Trading System, 2nd ed. (first edition published 1996),
a Wiley Trading Book 101.
[2016]. Financial Plans For Successful Wealth The resultant graph gives a
Management In Retirement, Lulu Publishing, sold by better insight into price moves
Amazon Services. within a timeless chart.
‡TradingView
‡See Editorial Resource Index

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How Bullish Is It?
Should You Buy New

52-Week Highs?
How often does this simple bullish strategy work? Here’s indicate that we are late. Second, have a look at the two
a test to find out. red trendlines that I sketched for you. They seem to form
a bearish falling wedge chart pattern. That pattern would
by Pawel Kosinski put me off from buying.
A
Of course, we could find many more examples of tricky
lmost every day we observe stocks that reach situations in such screener results. Another possible
their “new 52-week high.” It is often consid- complication would be seeing some old resistance above
ered a bullish sign, so such signals may be the current price. We could expect the price to stall there,
quite appealing for many traders. It is also and again, simple screeners will not detect that.
relatively easy to locate stocks making new Still, it would be interesting to find out whether the
52-week highs by using trading software or even one of fact that the price has simply reached its 52-week high
the free online screeners. But is it a good idea? It’s easy to has some bullish indication.
52 ICON:RAVENKA/ARROWS: KOVO VAN//SHUTTERSTOCK
visit one of these online screeners, search for candidates,

and then buy them. Sounds simple, doesn’t it? Putting it to the test
Figure 1 shows an example where I did this. I found I decided to check this by backtesting stocks for the
COLLAGE: CHRISTINE MORRISON
the stock candidate by using one of the online screeners period January 1, 2000–December 31, 2020. I wrote a
when searching on the criterion of “new 52-week highs.” computer program that simulates entering a trade when the
However, what we see may be confusing. At first, the daily closing price is the highest of the past 250 trading
52-week high is not so new; the stock seems to have days (this mimics the new 52-week high). At the same
been above its 52-week high for some time. That may time, the price “yesterday” was below this limit. This
TRADING STRATEGIES
is illustrated in Figure
2. We can see how the
price closes above a pre-
vious high that occurred
Nmax days ago. I enter on
open on the next day.
The main advantage of
this strategy is that I do
not buy stocks that have
been already above their
52-week for some time
(as we observed in the
example in Figure 1).
TRADINGVIEW
Rather the opposite: we
are the first to spot this
event. FIGURE 1: 52-WEEK-HIGH. The price of the stock is higher than its 52-week-high. Even so, the stock may be
I analyzed the stocks overbought, and a bearish rising wedge pattern has appeared.
from the Russell 3000.
I assumed that I risk
$500 on each trade
so that the number of
shares I buy is calculated
accordingly. Finally, I
state that the general
market, represented by
the ETF SPY, must be
bullish. I calculated this
by assuming that its
100-day SMA is above
the 400-day SMA.
I n my c om put e r
program, I made another
assumption: I want
this maximum, which
happened N m a x days
ago, to also be at least FIGURE 2: THE ENTRY STRATEGY. The price has closed above the previous high (that occurred Nmax days ago).
We buy on the open of the next day.
a 52-week high. So this
maximum is also clearly
tall. This constraint may be questionable (we could do in practice as such, but still, the backtesting should
it differently) but it will still allow us to draw good reveal the power of the concept. The objective is simply
conclusions. to check whether the price tends to go up or down after
The main issue with this strategy is when to exit a trade. breaching the 52-week-high.
There are many possibilities and therefore I chose a very
simple one at first: I leave the trade when the price of the
stock goes up a distance equal to four times the current
14-day ATR from the breakout price (denoted as BP in The objective is simply to
Figure 2). Alternatively, I take a loss when the price goes check whether the price
down a distance equal to four times the current 14-day- tends to go up or down after
ATR from the breakout price. A quite “symmetrical” breaching the 52-week-high.
strategy, where the risk/reward ratio is around 1.0.
This is a strategy that perhaps I would rather not use
Using some smaller range (say, Total net profit $954081 To be honest, I dislike the results.
twice the 14-day-ATR) may be too Profit factor 1.24 They are positive, but note that we
narrow. After all, stocks do not Max drawdown -30.45% traded in a bull market, so random
always trend (as a matter of fact, Number of trades 18895 trades might have led to a similar
they don’t most of the time), so I Percent profitable 62.45% performance. This can be easily
don’t want to be stopped out by Ratio average win/average loss 0.75 assessed by looking at metrics such
some chaotic motion around the Average trade 1.38% as the maximum drawdown. The
equilibrium. Therefore, the range Average time in market (days) 48 maximum drawdown is rather large
of four times 14-day-ATR should FIGURE 3: THE FIRST RESULTS. This table (−30.45%). Also, the number of
be wide enough to tell us about the of metrics shows the results of backtesting trades is huge, which means that this
market preference. Russell 3000 stocks using this 52-week high scenario happens too often.
What statistical results shall buying strategy. This could indicate that
I choose? The first one is the the breaching of a 52-week-
profit factor that is a ratio of All stocks Cheap stocks
(from Fig. 3) high does not need to be a
the gross profit and the gross Total net profit $954081 $418424 bullish factor. That is perhaps
loss. This parameter must be Profit factor 1.24 1.49 disappointing.
greater than 1.0 for profitable Max drawdown -30.45% -23.07%
strategies, but the higher Number of trades 18895 4636 Let’s change the
factor, the better. The second Percent profitable 62.45% 67.06% stocks
parameter is the maximum Ratio average win/average loss 0.75 0.71 We cannot treat all the stocks
drawdown, which is the largest Average trade 1.38% 2.36% equally. Each of them has its
decrease that your account Average time in market (days) 48 49 own “personality” and behaves
would be subjected to in the FIGURE 4: BUYING CHEAP STOCKS. This table shows the differently in various market
tested period. Normally, the sample results when backtesting Russell 3000 stocks using the conditions. But when we do
lower absolute value of this same 52-week high strategy, where this time only cheap stocks our backtesting, we treat them
parameter (that is, closer to were selected. Note that the results are much better than for the the same. This may mislead us
0%), the better. Then, we will standard case from Figure 3. sometimes.
look at what percentage of An example is the different
our trades were successful. Of course, a high value of behavior of cheap stocks. Some of them can be treated
this parameter makes us happy. The next parameter (the as ‘’fallen angels’’ that are hunted by investors. What if
average win/loss ratio) tells us how much we win with we check how these stocks behave when they reach their
respect to how much we lose. Again, it is preferable if 52-week high? Thus, for my next test, I decided to select
this parameter is high. Finally, we will check the average stocks in which the price was between $5 and $20. The
profit from our trades. results are shown in Figure 4.
And now, let us introduce some constraints: the price Now you can compare Figures 3 and 4 (or just the
of the stock must be greater than $5 and lower than two columns in Figure 4). We see that the cheap stocks
$500—even though there are not very many stocks priced outperform. Just look at the profit factor, which has
close to $500 or above anyway. jumped considerably. Also, the maximum drawdown
has improved, as well as the average trade. I’ll note that
So, the verdict is … Thomas Bulkowski also observed that buying cheaper
I guess you are curious about the results, so let’s have stocks may lead to good profits in his excellent book,
a quick look at them. They are shown in Figure 3, col- Evolution Of A Trader: Fundamental Analysis And
lected in a table. Position Trading.
What it boils down to: Buy rather cheap stocks if a
screener detects a 52-week-high.
Why “new 52-week Trading volume

highs”? Why not 150 days Many will tell you that trading volume is an important
or 350 days? indicator. A typical example is breakouts, where price
breaches a trendline. They say that high volume during
the breakout supports the bullish price action. As a mat-
ter of fact, I have not No volume Volume x 2 Volume x 3
14-day ATR. This
seen in it my own (Fig. 4)
distance allowed
trading and have Total net profit $418424 $137334 $53956
for some natural
not seen it when Profit factor 1.49 1.57 1.61
price oscillating.
backtesting “regu- Max drawdown -23.07% -14.68% -10.39%
My real trades are
lar” breakouts. So it Number of trades 4636 1483 588
more discretionary,
would be interesting Percent profitable 67.06% 71.34% 72.62%
so this is not what I
how important it Ratio average win/average loss 0.71 0.60 0.56 normally do, but the
is when backtest- Average trade 2.36% 2.69% 2.80% trick can teach us a
ing 52-week-high Average time in market (days) 49 47 47 lot. Still, you can do
breakouts. FIGURE 5: INFLUENCE OF TRADING VOLUME. We see that the high volume on the it in practice if you
I considered two breakout day is a bullish indication. are into automatic
cases. At first, the No volume Volume x 2 Volume x 3 trading.
trading volume on Total net profit $494774 $241981 $106351 The results for
the breakout day Profit factor 1.70 2.08 2.18 the cheap stocks are
was at least twice Max drawdown -21.42% -14.03% -10.32% shown in Figure 6. In
the 14-day volume Number of trades 4432 1417 577 the table, I compare
moving average. In Percent profitable 70.01% 72.62% 74.00% three cases. At first,
my second test, the Ratio average win/average loss 0.72 0.71 0.72
the trading volume
trading volume was Average trade 2.95% 4.40% 5.02%
plays no role. Then,
at least three times Average time in market (days) 61 66 74
the volume is twice
this moving average. the average of the
FIGURE 6: PRICE TRAILING. Compare the results directly with Figure 5. You see that the
I ran the backtesting price trailing improves the results, so the general price trend is rather upwards. past 14 days. Finally,
for the cheap stocks the volume is three
because they seem to outperform. The results are collected times the average (thus, we see the same scenarios as in
in Figure 5, and you can compare them with Figure 4. the previous sections).
As we see, some parameters improve with an increase in We see that the results are much better than before, so
the trading volume. This would indicate that my previous stocks really do trade upwards after their 52-week-high
statement on the influence of the trading volume is perhaps breakout.
not always correct—at least not for the 52-week-high. On
the other hand, the higher volume results in a rather poor Unconfirmed setups
win/loss ratio: it drops to 0.56. This can be compared Up to now, I have only shown the results where we entered
with the very satisfactory profitable percentage (these a trade after the setup was confirmed—meaning the price
two usually are connected, and one of these parameters closed above the breakout price on the daily chart. But
will suffer if the second increases). Here, this indicates what if we do it slightly differently, and say the price
that we buy relatively high, that is, close to the profit does not close above the breakout price. In other words,
factor region. So, on the breakout day, the price closed the high of “yesterday” broke above, but then retraced
higher than usual. This can be associated with the high at the end of the day.
volume. Perhaps we are seeing some institutional buying There is actually one advantage in this scenario: we
that lifts the price. buy potentially slightly lower. Of course, we risk more
because the market, as a whole, is undecided.
Trailing For this case, I ran my backtesting using the trailing
In the above, we assumed that the stop-loss and take- method, as described in the previous section. Also, I do
profit locations were “symmetrical,” that is, there was
the same distance to them from the breaking price level.
I have shown that the price tends to increase after the
breakout, so it would be nice to earn a bit more. After The backtesting should
all, the trend is your friend, as we know. reveal the power of the
In my backtesting, I decided to trail the price by moving concept.
the stop-loss upwards with the increasing price. As the
price rises, the maximum distance was two times the
not consider the trading volume. Thus, we are looking at Confirmed Unconfirmed
Figure 6 again, but only on its first column with results. (Fig 6)
The only difference is that the setups are unconfirmed

Total net profit $494774 $253089
now.
Profit factor 1.70 1.63
It may be a bit surprising, but the results are quite Max drawdown -21.42% -15.16%
decent (Figure 7), even though the trades based on Number of trades 4432 2642
confirmed setups outperform. This decent performance Percent profitable 70.01% 64.04%
of the trades based on unconfirmed setups may indicate Ratio average win/average loss 0.72 0.92
that the approaching of the 52-week-high is a good sign, Average trade 2.95% 2.56%
and perhaps aggressive traders can enter earlier. It is also Average time in market (days) 61 50
interesting that one parameter in the table is better than FIGURE 7: UNCONFIRMED SETUPS. The unconfirmed setups may also
lead to decent results.
before, that is, the win/loss ratio. This is not
so unexpected; we buy slightly closer to the 150 days 52-week (Fig. 6) 350 days
stop-loss level. Total net profit $567860 $494774 $393108
Profit factor 1.63 1.70 1.71
Why 52 weeks? Max drawdown -22.92% -21.42% -20.06%
In this article, we talk about trading the new Number of trades 5448 4432 3519
52-week high (or 250 trading days in my back- Percent profitable 69.33% 70.01% 70.59%
testing). But what if we change this magical Ratio average win/average loss 0.73 0.72 0.70
number? In the previous sections, we have Average trade 2.88% 2.95% 3.00%
seen quite remarkable results, but they may Average time in market (days) 60 61 60
still be a coincidence. For instance, the good FIGURE 8: OTHER POSSIBILITIES. The results suggest that we should just stay with
performance may only be a result of the bullish using the 52-week high (that is, 250 days) rather than using the 150-day-high or the
market represented by the S&P 500 index. 350-day-high.
Therefore, I decided to try other numbers as
well, namely, 150 days and 350 days. Like in the previous Summary
section, I decided to trail the trades. Also, I selected only In all the studied cases, buying the new 52-week high was
cheap stocks and assumed that the trading volume was profitable. Nevertheless, you can improve your entries if
not important. In other words, I return to Figure 6, the you do the following: choose cheap stocks, and pay atten-
first column, and compare the results. The comparison tion to the trading volume during the breakout day.
is made in Figure 8. It should be noted that the exit was based on a bit
We see that the case with the 150-day high is worse, of artificial rules since the objective was just to check
but still rather decent. On the other hand, the breakout whether the price tends to go up or down. Also, as
of a 350-day high is the best, but it does not differ much mentioned at the beginning: Investigate the other chart
from the standard 52-week high (just look at the profit patterns that turn up on the screen, and sketch other
factor—that is a good proxy of the whole performance). trendlines. In any case, the results shown in this article
Also, as expected, the breakout of the 350-day high may help you to fine-tune your entries.
results in fewer trades. Therefore, we do not need to aim
for 350 days, but rather, just stay with the well-known Pawel Kosinski, PhD, MEng, trades US and Scandina-
52-week high. vian stocks with a special focus on chart patterns and
price action. In addition, he enjoys developing trading
software and backtesting strategies. He can be contacted
via his website at lookintotrade.com.
It may indicate that the Further reading

approaching of the 52-week- Bulkowski, Thomas [2013]. Evolution Of A Trader:
high is a good sign, and Fundamental Analysis And Position Trading, John
aggressive traders can enter Wiley & Sons
‡TradingView
earlier.

TRADING ON MOMENTUM
Avoid Getting Shaken Out
Buy The Open, Sell The Close

If fast-paced day trading is too hec- this pattern. The chart should be in Step 1: Enter just above the near-
tic for your preference, and swing an uptrend during the first 10 to 15 est whole number in an uptrending
trading is too slow, then you may minutes of the market open, and you chart by 10:00 am.
want to look at the strategy outlined enter above the nearest whole number
in this month’s column. as price breaks out to the upside. Step 2: Set your initial stop-loss
$0.20 below the whole number.
by Ken Calhoun Step-by step action plan
T
Here’s how you can start using this Step 3: Stay in your position until
his month’s strategy is a rela- strategy: the end of the session and plan to
tively simple one, in which close at anytime after 3:30.
you buy between 9:30 and
10:00 am, and sell between The biggest challenge Step 4: You may wish to tighten a
3:30 and 4:00 pm. I have had is being trailing stop $0.50 below market at
patient enough to wait lunchtime in case the chart reverses
The all-day-long trade until near the end of course in the afternoon.
Your goal is to enter your position in the session to close
the morning and exit in the afternoon. out the trade.
In Figure 1 (UVXY), you can see Continued on page 26
eSIGNAL
FIGURE 1: BUY OPEN, SELL CLOSE PATTERN. Price increases all session long.
The MADH
The MAD Indicator, Enhanced

Here, the MAD indicator introduced last month is made average is the length of the shorter plus the half-period of
even better for technical traders. We’ll explain how the the dominant cycle in the data. (If the dominant cycle is
MADH is created and how you can put it to use. unknown, make the length of the longer moving average
twice the length of the shorter one.)
by John F. Ehlers The MAD and MADH oscillators came out of a
L
research project I’ve been undertaking to further my
ast month in my October 2021 article, “Cycle/ understanding of cycles data and improve the use of
Trend Analytics And The MAD Indicator,” I digital signal processing techniques for traders. I explain
introduced the MAD indicator as a “thinking some of my reasons and goals for pursuing that research
man’s” MACD. I shared this indicator that I in several recent articles in this magazine, including in
developed because I found it to be robust yet last month’s article and in my May 2021 S&C article, “A
elegant in its simplicity. Technical Description Of Market Data For Traders,” as
In this article, I will apply an improvement to the well as several others (see “Further reading” at end). The
MAD indicator to create a new version of it, which I research has led me to update my outlook and to change
call the MADH. I’ll show both indicators on a chart my approach to preprocessing data for the technical
for comparison, and I’ll explain why this improvement indicators I use.
makes it even more useful for technical traders. I’ll also In my research project, I wanted to display an oscillator
provide code to display the MADH. in a way that would demonstrate how it would behave as
the length of the moving average was varied. I felt this
A quick review of the MAD indicator could provide some of the insights into the characteristics
The MAD indicator is comprised of the difference of of cycles that I was looking for.
KORGEN/SHUTTERSTOCK
two simple moving averages. The length of the shorter The idea with the MAD oscillator is to show the trend
moving average is determined by the desired smooth- by taking the difference of two simple moving averages.
ness of the indicator, and the length of the longer moving The high-frequency components are canceled when the
DIGITAL SIGNAL PROCESSING
difference is taken.
If the difference of
the length of the two
moving averages
is one half the pe-
riod of the dominant
cycle, then the resul-
tant will be exactly
in phase with the
input price.
The MAD of-
fers an improvement
over the classic,
well-known MACD
indicator developed
TRADESTATION
several decades ago
by Gerald Appel
because the MAD FIGURE 1: THE MADH. The MADH indicator offers an improvement over the MAD indicator through the use of the Hann
offers a rationale windowing technique. The original MAD is shown in the first subgraph in red; the MADH is in the second subgraph in yellow.
for establishing the The same parameter values are used for both indicators. The improvement comes from the use of the Hann windowing
lengths of the mov- technique. That is, instead of taking the difference of two simple moving averages, the MADH takes the difference of two
finite impulse response filters that employ Hann windowing. The result is equally good timing signals but a smoother curve,
ing averages. which means fewer false signals.
A quick review of windowing cosine squared-shape coefficient amplitude distribution

In my September 2021 article “Windowing,” I showed that across the length of the filter. (This distribution envelope
a simple moving average (SMA), while being ubiquitous starts at zero at one end of the filter and smoothly rises to
in technical analysis, is not a particularly good filter. a maximum at the middle in a lazy “S”-shaped pattern,
The simple moving average uses a rectangular window and then declines symmetrically to the other end.) I
in its generation, and the Fourier transform of the sharp had reviewed several windowing functions—which
edges of this window led to “sidelobe leakage” in its are commonly used functions in statistics and digital
filter response. The solution to making a better average filtering—and ended up choosing the Hann filter, which
is to soften the sharp corners of the window. seems to me to be the best compromise for technical
For that, I nominated the Hann window, which has a traders.
MADH INDICATOR, EASYLANGUAGE CODE

{ For count = 1 to ShortLength Begin
MADH (Moving Average Difference - Hann) Indicator Filt1 = Filt1 + (1 - Cosine(360*count / (ShortLength +
(C) 2021 John F. Ehlers 1)))*Close[count - 1];
} coef = coef + (1 - Cosine(360*count / (ShortLength + 1)));
End;
Inputs: If coef <> 0 Then Filt1 = Filt1 / coef;
ShortLength(8),
DominantCycle(27); Filt2 = 0;
coef = 0;
Vars: For count = 1 to LongLength Begin
LongLength(20), Filt2 = Filt2 + (1 - Cosine(360*count / (LongLength +
Filt1(0), 1)))*Close[count - 1];
Filt2(0), coef = coef + (1 - Cosine(360*count / (LongLength + 1)));
coef(0), End;
count(0), If coef <> 0 Then Filt2 = Filt2 / coef;
MADH(0);
//Computed as percentage of price
LongLength = IntPortion(ShortLength + DominantCycle / 2); If Filt2 <> 0 Then MADH = 100*(Filt1 - Filt2) / Filt2;
Filt1 = 0; Plot1(MADH, "", yellow, 4, 4);

coef = 0; Plot2(0, "", white, 1, 1);

And now for the improved MAD: MADH update many indicators used for trading. One of these
The improved MAD filter—the MADH—is just a com- newly updated indicators is the MADH presented here
bination of the two above concepts. That is, instead of (the moving average differenceHann).
taking the difference of two simple moving averages, the In upcoming articles, I will share additional updated
improved version takes the difference of two finite impulse indicators based on this research.
response (FIR) filters that employ Hann windowing. For
simplicity, I call this new improved indicator the MADH John Ehlers, a Contributing Editor to Stocks &
(that is, MAD with Hann windowing). Commodities, is a pioneer in the use of cycles and
A comparison of the original MAD indicator and the DSP (digital signal processing) technical analysis. He
improved MADH indicator is shown in Figure 1. The is president of MESA Software. He can be reached
same parameter values are used for both indicators. through his website at MESAsoftware.com. The website
The original MAD is in the first subgraph (in red), and also provides information on Ehlers’ upcoming annual
the MADH is in the second subgraph (in yellow). Both workshop to be held online October 18–22, 2021, during
have about the same overall response, but the MADH which he will teach, discuss, and take questions on the
is smoother. concepts from his decades of work in cycles analysis.
Excellent buy and sell indications are at the valleys
and peaks, respectively, of the indicators. The valleys The code given in this article is available in the Article
and peaks are determined when the rate of change of the Code section of our website, Traders.com.
indicators are zero, so when the one-bar difference of the
indicators cross zero, these are the buy and sell timing See our Traders’ Tips section beginning on page 48 for
signals. Since the one-bar difference is analogous to the implementation of John Ehlers’ technique in various
derivative in calculus, and since taking the derivative technical analysis programs and trading platforms. Ac-
always increases the noise level, the MADH indicator companying program code can be found in the Traders’
will have fewer false signals that are due to noise. Tips area at Traders.com.
I provide EasyLanguage code for the MADH indicator
in the sidebar, “MADH Indicator, EasyLanguage Further reading
Code.” Ehlers, John F. [2021]. “Windowing,” Technical Analysis
of Stocks & Commodities, Volume 39: Septem-
Simply MAD about market data ber.
My recent research into the nature of market data and [2021]. “Cycle/Trend Analytics And The MAD
the characteristics of cycles that occur in data has led me Indicator,” Technical Analysis of Stocks & Com-
to make some significant improvements in the indicators modities, Volume 39: October.
and oscillators I use for trading. My goal is to share some [2013]. Cycle Analytics For Traders, John Wiley
of this work with you as well as to explain my rationale & Sons.
for it. The research has evolved my outlook on market
data and on trend/cycle analytics. It has also led me to
TRADING ON MOMENTUM
CALHOUN instead of just a small part of the (OTO) order to automatically trail
Continued from page 23 opening range. your stop value.
inSightS: why thiS trADe MAnAgeMent tipS Ken Calhoun moderates a popular
technique workS You may find it helpful to use a trail- live trading room for active traders.
The first main benefit of this strategy ing stop in combination with this pat- He is the founder of TradeMastery.
is to avoid getting shaken out by try- tern. The biggest challenge I have had com, an interactive webinar site
ing to navigate the ups and downs of is being patient enough to wait until for active traders and is a UCLA
an intraday chart pattern. The second near the end of the session to close alumnus.
advantage is that you can potentially out the trade. One solution is to use
profit from the entire day’s move a conditional one-triggers-the-other
Trading isn’t just a hobby,
it’s your future.
We built thinkorswim Trading™ to give you innovative tools,
access to trade desk experts, and a community of traders
who share strategies right on the platform. Because even
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All investing involves risks, including loss of principal. TD Ameritrade, Inc., member FINRA/SIPC a subsidiary of the Charles Schwab Corporation.
© 2021 Charles Schwab & Co., Inc. All rights reserved.
INTERVIEW
Market Technician, Creator Of Stage Analysis Model,

And Financial Newsletter Publisher
A Conversation With
Stan Weinstein
Stan Weinstein’s 50+ year career in the markets has and that year he was named “market timer of the year”
been the joy of his life, after that of his family. He be- by Timer Digest. He shares fellow “Wall $treet Week”
came interested in the stock market during his college guest Martin Zweig’s outlook that the “the trend is your
days and decided to become a subject expert. After a friend” and “the tape tells all.”
short stint at two brokerage firms, he worked at Indica- His 1988 book Secrets For Profiting In Bull And Bear
tor Digest, and then in 1972 became a co-partner with Markets became not only a bestseller but also a classic
Justin Mamis publishing the popular The Professional on technical analysis. The book is still in demand today
Tape Reader (PTR) newsletter. He bought Mamis out due to its valuable investing insights, timeless views
in 1976 and continued publication of PTR until 2000. on price evaluation, top-down approach, and rules
While still publishing PTR, Weinstein launched a new on trading. The book also describes the stage analysis
subscription service in 1990 for institutional-focused concept he developed that became a staple for techni-
clients, called Global Trend Alert (GTA), which he cians and market analysts and is still widely used 30+
continues to publish to this day. years later.
In the late 1970s he began appearing frequently on Stocks & Commodities Contributing Writer and
PBS’s “Wall $treet Week With Louis Rukeyser” TV ETF columnist Leslie N. Masonson interviewed Stan
show and also became a frequent guest of Paul Kangas Weinstein via email exchange in early August 2021 to
on PBS’s “Nightly Business Report” for many years. In ask him about his two financial newsletters, his stage
mid-September 1987, Weinstein warned his clients to analysis concept, and to obtain some of his market
take defensive positions before the October 1987 crash wisdoms from his very long investing career.
Stan, how did you first was life-changing for me: Technical chose to take a job training in a very
get interested in the stock Analysis Of Stock Trends by Robert small brokerage firm (which is also
market? Edwards & John Magee. That was the long gone—AT Brod) for a measly
Even as a kid, numbers always start of my technical journey, which $75 per week! While that served as an
fascinated me. I was a big sports continues to this day! excellent introduction, I then moved
fan (and I still am) and every day, on to a larger brokerage firm (which
I’d take the sports section of the After graduating from Hofstra is also long gone—Walston & Co),
paper and follow the batting aver- University with a major in econom- which had much better research and
ages of my favorite team (which, at ics, did you decide to find a job in greater resources.
that time, was the NY Giants). At the brokerage industry or was that
the same time, my dad would take later on? Did you learn technical analysis at
the financial section and look at his While I was still in college, on my that firm or did you learn about it
stocks. I eventually became curious lunch breaks, I’d often sneak out to on your own before that?
about what he was looking at and I a nearby brokerage house (which is No—the reality is that I was very
started studying “those numbers.” now long gone, called Edwards and much “self-taught.” After reading
Next, I took out a few trial subscrip- Hanley) and this helped me become and studying the Edwards & Magee
tions to some fundamental services even more addicted to the market, book, my wife, Rita, and I started
as I became even more interested. But as I found it fascinating to watch the keeping up charts, which increasingly
while it intrigued me, I lost my initial numbers go across the tape. Having bettered my “feel” for the market. To
KATJEN/SHUTTERSTOCK
investment (my Bar Mitzvah money). always been somewhat of a risk-taker this day, while I of course no longer
Then, one day, when I was in the col- (even in my younger days), rather than have the time to do actual chart plot-
lege library, I came across a book that pursuing a career in economics, I ting, I think you get a better “feel”
when you do the charts yourself rather newsletter. That’s where I met Justin but the growth of PTR was an evolv-
than looking at the red, white, and Mamis who worked there. We both ing process. Whereas we had few
green that flashes on your computer saw the financial world through the subscribers when we started in 1972,
screen. But, since it’s more efficient same technical lens and worked well by the end of 1974, after correctly
to view charts on a computer, giving together. Then in the early 1970s, Jus- calling that bear market, subscrib-
up manual charting is a small price tin left Indicator Digest and started ership had already started to take
to pay to be able to go through so The Professional Tape Reader. Soon off. And, happily, it increased to an
many stock charts. thereafter, I told him that I was going even greater degree when we turned
to start a newsletter, and he told me bullish in 1975 and hopped on to the
Was reading Edwards & Magee an that was silly, we should combine our next bull market. Thereafter, the next
eye-opening experience? efforts and form a partnership. positive “brick in the wall” was that
Most definitely! And not only did it those two calls brought PTR a lot
launch me on my technical analysis When you started The Profes- of favorable articles, which led to
journey, but in addition, it made me sional Tape Reader, who was your national attention, which led to my
think of ways to expand technical intended audience? first appearance on Louis Rukeyser’s
analysis to be much more meaning- To be honest, since we started on a “Wall $treet Week.” That really
ful. Whereas those authors focused shoestring, our intended audience was helped the sales curve take an up-
mainly on “formations” (diamonds, anyone who wanted to be a subscriber. ward turn. And subscriptions took
triangles, head and shoulders, etc.)— But then, after our bear market call off again when we turned bullish in
and they are important—I started in January 1973—which, fortunately, the summer of 1982, when I made a
“fooling around” and testing differ- correctly caught the granddaddy bull call on Paul Kangas’ “Nightly
ent moving averages (which quickly 1973–1974 bear market—our sub- Business Report” (in July 1982) and
became a big part of my system). And scribership increased significantly the market took off that August. Then,
finally, while I rightly give credit to and we could see from much of the after the 1987 “market timer” award,
the Edwards & Magee book, I hon- correspondence we received that my book Secrets For Profiting In Bull
estly found their work heavy reading, more and more of our subscribers (but And Bear Markets was published
so when I wrote my own book, Se- certainly not all) were sophisticated (in early 1988), which was another
crets For Profiting In Bull And Bear market players. In addition, many big boost.
Markets, I did my best to write it in were stock brokers.
a more user-friendly fashion. Why did you decide to end publica-
How often was the newsletter pub- tion of PTR in 2000?
Which technical analysts do you lished and how was it delivered? I’ve always tried to be totally dis-
most admire? In those “good ole days,” PTR was ciplined in dealing with the stock
Going way back, I thought Edson published every second week and market, which is my “weight of the
Gould was a genius. In addition, was delivered by the good old US evidence” approach, where I listen to
although he wasn’t a chartist, never- Mail. But later on, as things evolved, what the majority of my time-tested
theless I think the late Marty Zweig we offered special delivery service. gauges are “saying” about the market.
did excellent work. And finally, while We also added a recorded weekend In the same manner, I attempt to make
also not a true chartist, for big picture update, which helped bridge the gap rational and disciplined decisions in
analysis, I feel that the late Richard of the alternate week in which we other areas of my life. So after my
Russell did top-notch work. didn’t publish. book was published—which turned
out to be a business bestseller—I was
Was publishing The Professional In 1987, you were named “market presented with the opportunity to
Tape Reader (PTR) your next timer of the year” by Timer
focus? Digest because of your
Yes. This was a very important accuracy on the market
next step in my journey. After leav- direction that year. I as- After all these years, I still
ing the brokerage industry (in late sume that helped sales of find the market fascinating
1969 in the middle of the vicious PTR—is that a correct and challenging.
1969–1970 bear market), I took a job assumption?
at Indicator Digest, a leading market Yes, that certainly helped,
we stayed bullish through- of success.
out most of the 1990s, We use a system to rate the mar-
How you deal with a losing turned bearish in time to ket’s turn of events on a scale of 1
position will make you a catch the 2000–2003 and to 10, with 10 being the worst or
winner in the stock market. 2008–2009 bear markets, most serious. The idea is that the
and then participated in market isn’t going to be a long-term
the bull markets that fol- bull on Monday and by Tuesday be
start an institutional service (Global lowed those terrible selloffs. a long-term bear. The market gives
Trend Alert). And what I thought But again, going back to being hints. So here is our process for our
would simply be an adjunct to PTR wrong (which isn’t a sin when predict- rating system: Assume we’re in a
starting in early 1990 ended up being the market), a perfect example of bearish environment. First, if you
caming a very successful venture. For temporarily being “out of step” and identify a short-term problem (we’d
the next 10 years I juggled publishing quickly getting back in gear was in call it a “1” or a “2” on our scale),
PTR and GTA along with speaking the February–March 2020 period. In you start reducing your exposure. If
at seminars and doing radio and TV early February of that year we were the identified problem becomes more
interviews. still quite bullish and then in mid- serious and takes on intermediate-
In addition, our three daughters February we looked for a correction term proportions (we’d call it a “5”
had grown up and gotten married but not a major crash; however, by or a “6”), you make further adjust-
and started families, and since family early March we changed our tune and ments to your positions. Finally, if
time has always been a top priority for became aggressive sellers and the rest the intermediate problem degrades
my wife and me, it became obvious is history as the market got hit quite to a greater degree (what we’d call
that some choices had to be made. hard by March 24, 2020. a “10”) then the market can end up
Since I never want to totally retire, in a long-term negative situation
as I love the never-ending challenges To what do you attribute your good (a bear market). So as you can see,
of the stock market, we sat down and batting average in forecasting the you would not wait until you get to
came up with what we felt was the market? this point to begin selling. If you’ve
next rational move in this journey. We actually do less “forecasting” been playing the game properly in a
For that reason, I retired PTR and and more “analyzing and reporting” disciplined manner, you would have
stopped doing seminars and radio and what we see in the charts and indi- started reducing at 1 or 2, and as it
TV interviews, and chose to strictly cators when the “cards come out of became an intermediate problem,
concentrate on the Global Trend Alert the deck”—that is, as market events moving to a 5 or 6, you would have
service. (This newsletter and service unfold. I use that phrase often but continued to reduce. Following this
is an in-depth institutional product for good reason, because the mar- approach has been successful for us
that offers two levels of service: level ket continually gives us hints on a over the past many decades.
1 is receiving just the newsletter, day-by-day basis. If we truly listen
while level 2, which obviously comes to what the market is whispering, Mamis sold his half of the business
with a higher price tag, also includes we’ll usually end up in sync with the to you in later years. Why did he
personal consulting.) market’s important moves. So using do that?
this approach, you’re actually doing The answer is two-fold. First, be-
Forecasting the market is fraught less “predicting and forecasting” cause my wife and our three small
with risk. Were there any years after but instead, staying in gear with the kids wanted to head south, which we
1987 where your market calls were message of the tape. did in 1977. And I feel that was one of
wrong? This is why I cringe when I hear my best “calls” in life. And second,
While only the liars are 100% on many of the financial programs although Justin and I worked well
right, I’m most proud of the level of the economists and sometimes even together, we had different goals. I’m
consistency that we’ve achieved over technicians (with whom I often dis- an admitted workaholic so at the end
the past 50+ years. And although agree) “predicting” that the market is of 1976, I bought Justin out and our
at times we’ve been off for a few going to make a top or a bottom on family became Florida residents.
days or a week or two, we’ve never, any given day or week in the future.
as the cards came out of the deck, To me that’s simply a parlor game On September 17, 1987, you men-
missed a major move, which is how and is likely to have a low probability tioned in PTR that you saw “omi-
nous clouds on the horizon” and market started to shape up
then on October 15, you wrote, once again and we became
“This is definitely the time to initiate more positive. As human beings, we all
defensive positions.” You certainly love to be right and hate to
prepared your subscribers for a Your bestselling book be wrong. This is why, in my
market decline. Secrets For Profiting In opinion, so many traders and
While obviously no one can pre- Bull And Bear Markets investors do the opposite of
dict the future with 100% accuracy, was published in 1988. their discipline.
what I feel is far more important How long did it take you
than “predicting” is to examine “the to write and when did you
cards as they come out of the deck” start writing it? How did you come up with the
and evaluate what is taking place. In Although it’s now in the rear-view four stages of your stage analysis
that September–October 1987 period mirror, I remember it vividly, as it concept?
that you refer to, there were many took a big chunk out of my and my This was one of those “aha” mo-
signs that the market’s subsurface wife’s life. I worked on it throughout ments. As I was writing an article in
technical condition was weakening, 1987 and, at that time, I lived two PTR in the early 1970s and I wanted
despite the rally attempts. Histori- lives. During the day I focused on the to get the point across that, in most
cally, that has been the precursor to overall market and PTR. Each night, cases, stocks don’t suddenly go from
serious market declines. That same I’d scribble paragraphs on a pad since being bearish to bullish or vice versa,
pattern helped us turn negative in I’m one of the few authors around who but instead evolve in a process. So I
January 1973 before the 1973–74 doesn’t type. Then my wife would wrote about how just like a house
bear market. It also made itself felt type the input each night into a word needs a foundation, a stock, in most
in late 2007 before the 2008–early processor—it sure would have been cases, also needs a foundation or base
2009 debacle. So history truly does easier with today’s computers. And as before it launches a substantial move.
repeat and if we learn to watch the we put each chapter together, we sent And in the same vein, after an issue
flashing red lights, it will keep us out it off to Dow Jones and it eventually has a big move, the process of distri-
of serious trouble. became my book. bution eventually becomes a reality
as the forces of supply and demand
You were a guest on Paul Kangas’ Your book is a masterpiece in a move into equilibrium. This usually
“Nightly Business Report” on number of ways. First, it’s written happens when the news is very good
PBS on Monday, October 22, 1987, in plain simple language, as though and the topping process starts.
the day of the crash. You said the you’re having a conversation with As I continued writing the article,
technicals had weakened in late someone. Also, you use tons of I realized that we could simplify all
August. You said you would sell charts. You also repeat key points the wild short-term moves into four
into the subsequent rally you were and share insights from your years major stages. Thereafter, I made it
expecting. What was your reaction of experience. Where did you learn a big part of PTR and my book too,
to the crash day and what were your to write in such a conversational and, of course, I’ve carried it forward,
market thoughts going forward at style? refining it over the years in the GTA
that point? To me, it wasn’t really so much a newsletter.
I was in USA Today the Friday be- learning experience as it was just
fore and had warned of the possibility being myself. When I first went to I understand
of a crash, but I didn’t expect it to be Indicator Digest and I was asked your investing
nearly as devastating as it turned out to write articles, I said, “I’m not a approach to
to be on the following Monday. writer.” One of the other analysts be top-down,
At that time, I was extremely nega- turned to me and said, “If you can which means
tive and expected only a short-term talk, you can write.” From that point first looking
oversold rally, which did soon unfold, on, I adopted a writing style by at the market
but I didn’t think the market would simply asking myself: If I were sit- trend and tak-
heal itself as quickly as it did. But as ting in my living room and trying to ing off from
the cards came out of the deck and get a point across to someone, what there. Can you
things unfolded, in early 1988 the would I say? briefly describe
in the $20–$22 zone, and the 200-
day moving average is nearing that
area (let’s say it’s at $19.50), there’s a
good chance the stock is undergoing
distribution and has moved into stage
3 (the topping phase). Interestingly
enough, at this time, the news will
usually be very good, which is why
the stock had its big move. But here’s
where so many market players who
don’t understand technical analysis
FREESTOCKCHARTS.COM
and simply read the newspapers and

listen to the talking heads on TV so
often go wrong. Far too often, they
FIGURE 1: STAGE ANALYSIS. This demonstrates the concept of four stages on a chart of AAPL. think that because the news is good,
the stock is still a buy. They do not
the four stages that are shown in the age is at $10.25. understand that since it’s no longer
example chart of Apple (AAPL) in Ideally, when it finally goes advancing on the good news, it’s
Figure 1? “topside” and breaks out above the very likely that the market has now
Your question fits in perfectly with resistance at $10, as well as its 200- “discounted” the favorable news and
what I talk about in my book, which day moving average at $10.25 (on a the stock is undergoing distribution—
is my “forest to the trees approach.” closing basis; intraday moves often that means moving from strong hands
That means that you start out with lead to false breakouts and whipsaws), that were the early buyers to weak
the big picture (the overall market), as that’s the sign it’s moving into stage hands—the “Johnny-come-latelies.”
it’s obviously easier to make money 2 and we should consider buying it. Now it eventually breaks down not
on the buy side when the major trend Then, we can take it one step further only below the floor of support at $20,
is bullish. Then, moving down the to separate ideas that are just so-so but also below the moving average at
pecking order, the next important step from potential really big winners. $19.50, and that’s the signal that the
is to focus on those few groups that Here’s where volume comes into stage 3 top has been completed—it’s
are demonstrating the best relative the game. If a breakout occurs on now entering the dangerous stage 4
strength. Finally, I zero in on those no significant increase in volume, declining phase. However, unlike
individual stocks within those posi- even if the stock moves ahead, it’s when it moves into stage 2 when
tive sectors that appear to offer the not likely to be a big winner and I’d volume confirmation is an absolute
best risk/reward outcomes. With that pass on it. However, if volume picks necessity, conversely in stage 4, while
firmly planted in mind, let’s get to the up considerably (at the minimum, I an increase in volume is helpful, even
specifics of stage analysis. like to see a breakout with at least if there isn’t a significant increase
Stage 1—the basing phase—occurs double and ideally triple the average in volume, I’d still be an aggressive
after a stock has had a decline. If while volume of the past several days), that’s seller, as history shows that “stocks
the base forms, the 200-day moving a sign that the stock has “a tiger in can fall from their own weight.”
average is still far above the basing the tank” and those are the issues
formation, it’s too early to consider that have the greatest probability of I notice that you use bar charts
doing aggressive buying even if the significant success. Moving ahead, rather than candlestick charts. Why
stock starts to break out of its base. although it won’t be a straight-up was that your choice?
However, in those cases where the affair (there will be short-term cor- While I’m most definitely not put-
base is completed and the breakout rections along the way), as long as all ting down candlestick charts, I found
occurs at or near its 200-day mov- the short-term pullbacks hold above I get my best results by simply stick-
ing average, those are the issues we the rising 200-day moving average, ing with good old daily and weekly
should focus on. As a hypothetical the stock is still in stage 2. bar charts along with volume. And,
example, let’s say the stock is basing Eventually (possibly a year later or rather than flying off in all direc-
between support at $8 and resistance so), let’s say the stock has moved up tions, when I used to speak on the
at $10 and the 200-day moving aver- to $22 and it starts to move sideways seminar circuits, I used the phrase
“KISS”—keep it simple, stupid (even since, for them, it isn’t a full-time oc- what do you currently use for rela-
if we’re not stupid)—so I don’t want cupation. I tend to be a perfectionist tive strength?
to complicate matters. and anything that can help me attain I subscribe to the Reuters Eikon
an even higher batting average is my system for all my charting needs
“Stage analysis” has received wide- goal, so that’s why I, along with my and they provide different relative
spread coverage since the book’s staff, follow so many. strength options. But I want to stress
publication and has been adapted that while relative strength is always
by many technical analysts and indi- Which of your indicators have you meaningful, with the markets now
viduals as an important element of found to be the most consistent in moving at warp speed, I no longer
their work to decipher the market’s flashing good long-term buy signals place relative strength in as high a
health as well as a stock’s position and which ones are best for sell position on the totem pole as I did
in the cycle. You must be very proud signals? 20 or 30 years ago.
of your contribution. I find the same ones to be effective
I most definitely am, just as I’m in both identifying market bottoms You mentioned in a previous inter-
pleased to see that many technicians and tops. If I was on a desert island view that “I’m a really good prob-
also use my “weight of the evidence” and could only have a few gauges ability trader.” Can you explain
approach. They even use that exact dropped from an airplane to me what you mean?
term, which basically means that each week, I’d focus on the advance- The answer is really the sum total
I listen to what the majority of my decline line, along with the market of the important points that we’ve
indicators are saying at any point in indexes in relation to their 200-day already discussed. To have as high a
time, rather than focusing on only moving averages for investing or 50- batting average as possible, you want
one or two indicators. Over time, no day moving averages for short- to in- to have the market’s major trend in
matter how good an indicator is, it termediate-term moves. In addition, I your favor. Then, while trading, you
will sometimes go awry, but when place great weight on my proprietary also want the short-term outlook
you listen to the majority of the time- S&P and “secondary surveys” (which to be positive as well. In addition,
tested gauges, I’ve found it’s unlikely calculates the percentage of stocks in it’s crucial to have favorable group
that that problem will occur. each of the universes that are techni- support since, as I’ve written over
In addition, I’m also proud that cally healthy in stages 1 & 2) each the years, if there are two equally
other indicators that I developed (such week and comparing their action to good-looking chart patterns but one
as my eleven o’clock indicator and my the market averages. is in a so-so group while one is in a
last hour indicator) have also been hot group, the chances of success are
popularized. However, what’s a bit I see that you use weekly charts far greater if you buy the stock in the
frustrating is that while many tech- for the investing time horizon and strong group. And finally, if you’re
nicians do properly give me credit, daily charts for your trading time- buying a breakout, you want volume
there are others who don’t and they frame. I assume the weekly charts confirmation. Conversely, if you’re
use it as their own creations. But as are more meaningful for investors, buying on a pullback, you want the
we all know, life, as well as the stock while the daily charts are better for stock, as it corrects, to hold near the
market, isn’t perfect—so it’s not that traders? prior breakout point and, in addition,
big a deal; it’s just the way it is. That’s 100% correct. But even volume should be contracting on the
when trading, I like to look at both correction.
Going back to what you just said the daily and weekly charts, as you If all those things are in your
about “the weight of the evidence,” may not realize by just looking at favor—although, of course, there’s
which you use to determine the the daily chart that there’s overhead never a guarantee of success—the
market’s health or lack thereof, I resistance not far from current levels probabilities (which is all we can
know that you track close to 100 that were registered, say, 14 or 15 talk about when dealing with the
indicators. Wouldn’t a dozen or so months ago, which wouldn’t show future) are very good that you’ll have
be able to identify the market trend up on the daily chart. a winner!
with a high probability?
The answer is yes as long as you I see you use Mansfield relative When and why did you decide to
choose the top dozen and that’s what strength on the charts in your book. offer Global Trend Alert to institu-
the average trader/investor should do Since that service no longer exists, tions rather than to retail clients?
daily update in addition because you believe it will lead to
to the weekend report more winning trades. Do you think
History truly does repeat that you referred to. And this is the case for the majority of
and if we learn to watch finally, we also publish those who try that approach?
the flashing red lights, it an incredibly detailed First, very few people do this dis-
will keep us out of serious quarterly report, which cipline. Second, you don’t have to do
trouble. is jam-packed with lots it forever. But using it, you can look
of graphics and it not only for patterns in order to evaluate tech-
covers the entire domestic nically what may have gone wrong
When I started GTA in 1990, it was market but also focuses on markets with a trade, and to find out where
designed to be strictly an institutional and stocks around the globe. As for you might improve. Winning trades
product that was a good adjunct to how I have time to do it all, the answer make us feel good (as well as adds
PTR, the newsletter for retail clients. is twofold. First, I’m a workaholic and money to our bank account), but they
As for why I started it, it was a case I really enjoy poring through all the also puff up our ego. As I wrote in
of finances, since institutions can pay charts and input. The second half of my book, how you deal with a losing
much more than retail clients for in- the equation is that I have a terrific position will make you a winner in
depth research, and also, it gave me staff who help me accomplish it all. the stock market.
the opportunity to offer one-on-one Before worrying about a di-
consultations with talented profes- I didn’t notice any ETFs in your ary, when trading, it’s important to
sionals in the institutional realm. That recommendations. Do you ever quickly identify any investments or
wasn’t an option with PTR, since that recommend them? trades that aren’t going your way and
was strictly a reading product. We do, at the right time, recom- to quickly cut your losses, rather than
However, after GTA was in ex- mend ETFs. It can come in more trying to tough it out.
istence for 10 years, I retired PTR. with our one-on-one consulting. In the meantime, as far as the diary
Some of those former subscribers Some of our clients care little about concept is concerned, we can use it
were disappointed because they ETFs while others use them to a great to look for patterns. Look to see if a
couldn’t afford GTA’s prices. So we degree. So in our consulting, where trade didn’t work out because proper
offered a limited slimmed-down we feel very strongly (either positively volume didn’t confirm the breakout;
version with no consulting for those or negatively) about a given sector, or see whether you “jumped the gun”
ex-PTR subscribers who could afford and if that client prefers ETF buying and anticipated a breakout that never
GTA at the reading-only level (which and selling, we spend time focusing occurred; or perhaps you bought
was still much more expensive than on those ETFs that look the best and a good chart in a bad group. And
PTR), while the institutions get the worst to us. while any one mistake isn’t going to
entire package. be a “bellringer,” if you see a pattern
You were quoted as saying: “My develop where several losing trades
In reading through a recent week- objectivity increases in direct profit into a certain category, then you
end issue of GTA which was about portion to how far away from Wall can be aware of what your weakness
12 pages long, I was impressed by Street I am.” I guess living in Ft. is and can work to correct it. Finally,
the amount of analysis provided, Lauderdale, FL for decades has if you see that you properly “checked
with a market overview, indicators, provided that opportunity to you. all the boxes” and it was a matter of
and, your individual stock recom- That is certainly true, and for sev- a good-probability call simply not
mendations. How do you have the eral reasons. When my wife and I working, then there’s nothing to be
time to publish such a detailed and along with our three daughters moved upset about—it’s just a case of know-
comprehensive service? to Florida in 1977, it turned out to be a ing that life and the stock market
It’s truly a labor of love. After all “stage 2” (bullish) move on all levels— isn’t perfect.
these years, I still find the market fas- both from distancing myself from the
cinating and challenging. It’s actually Wall Street nonsense, and second, You’ve mentioned in the past that
become much more challenging in from a lifestyle point of view. an investor can rack up big gains by
recent years than it was in the 1970s being right less than 50% of the time.
or 1980s. As for what we provide You urge investors and traders to The key is to cut your losses by using
our institutional clients with, I do a keep a diary of their losing trades stops and, in addition, to let your
winners run—is that correct? in a declining stock can
You just asked a great question become much “cheaper.”
and answered the question perfectly. That’s why I wrote in my
If you follow the proper
If you follow the proper discipline book that “rather than discipline and let your
and let your profits run and quickly buying low and selling profits run and quickly cut
cut your losses, you can be right less high, I prefer to buy high your losses, you can be right
than 50% of the time and still have and sell higher!” less than 50% of the time
one heck of a bottom-line positive and still have one heck of a
result. However, I think we can do Have you found that bottom-line positive result.
even better than that. If you’re totally most investors and trad-
disciplined, I think the probabilities ers have a hard time
favor a success rate above 70%. determining when to sell a position of market timing, they aren’t good at
they hold? making those calls. In addition, they
One of your key market rules is Absolutely! And for traders, that’s rationalize that “nobody can time
not to hold onto losers and to be even harder than for investors. First, the market” and they come up with
objective and dispassionate. But as far as investors are concerned, I answers like “you should buy only for
most investors and traders cannot think from an investing point of view, long term,” while I counter with Lord
effectively do that. Why do you think if you just follow my stage analysis Keynes’ quote: “In the long term,
that is? concept and, as long as the stock is we’re all dead.” They also stress buy-
I think that it comes down to one in stage 2, the investor rides it up and-hold so they don’t have to worry
word, which is ego. As human beings, until it moves into stage 3 where they about being wrong because they feel
we all love to be right and we hate to should, at least, reduce the position that eventually they’ll be right. They
be wrong. This is why, in my opinion, and eventually sell the remainder also use dollar-cost averaging, all of
so many traders and investors do the when it breaks down into stage 4, which takes the onus of their not be-
opposite of that discipline. If they buy then you won’t find the game all that ing able to properly time the market
a stock, let’s say at $50, rather than difficult. off of them.
stopping it out if it breaks below an As far as the trader goes, it’s much
important level or moving average more challenging. I think there are What are the biggest mistakes inves-
(let’s say, in this case, it’s $47), and two important concepts to follow. tors make?
taking the quick loss, they instead One: If a stock breaks out and rockets In a nutshell, it’s things we’ve al-
ride it down. Then when it drops to higher and then becomes extended, as ready covered such as 1) not quickly
$40, and they have a big loss, they soon as you see reversal action (the cutting losses in a losing position; 2)
then rationalize—that if it was a good stock moves to a new high and then not waiting for the stock to “shape up”
buy at $50, it’s a better buy at $40 sells off later in the day and closes before buying it and instead trying to
and they average down. Then when unchanged after making a new high, bottom fish; 3) depending too heavily
the stage 4 decline takes it to $30, or even worse, down on the day), and on fundamental analysis and listening
they’re really in trouble. there’s no nearby support, I immedi- too much to the media rather than, at
As far as I’m concerned, I’m ready ately suggest you start to do reducing. the minimum, synthesizing technical
to be wrong on the next uptick or Thereafter, if at any point it closes analysis into their game plan. There
downtick, but it drives my point home below its 50-day moving average, if are, of course, other mistakes but I
that you should never let your ego you’re a trader, I’d immediately sell think these are the biggies.
dictate your market moves. And a the remainder of the position.
corollary to that losing tactic is how Do you believe that today’s investors
often so many people (again letting Why do so many investors, as well and traders have available tools
their ego take hold) who aren’t even as many financial advisors, still to analyze and trade the market?
in a given stock see it decline sharply use and believe in the buy-and- And, if so, why have the majority
and want to be a hero and want to hold strategy versus using market not succeeded?
catch the bottom, so they “guess” timing? Yes, the tools are there but unfortu-
that the stock is at the low and they I think the answer is simple: be- nately the overwhelming majority of
buy it even though it’s still in stage cause they don’t learn how to properly investors don’t reach into the “tool-
4, and then they find out that “cheap” play the game, they don’t have a sense box” using charts and other forms
It’s usually advised to experience?
have a diversified port- I’ve been asked several times over
Just like a house needs folio to reduce risk, the years to write another book. My
a foundation, a stock, in but that won’t help in answer has always been and still is
most cases, also needs a bear market. Bear that my existing book is my contribu-
a foundation or base markets took place be- tion to literature and to stock market
tween 2000–2003 and wisdom. Again, fitting in with why I
before it launches a 2008–2009. Isn’t it better long ago retired the PTR newsletter
substantial move. to be cash or short if you and no longer do seminars or media
can do that successfully? interviews (I’m making an exception
What is your view? for this interview, as I respect the
of technical analysis. Instead, in my Most definitely! Unfortunately, research that you did on me and my
opinion, they spend much too much far too many market players are system; you’ve done a fabulous job
time watching the talking heads on intellectually lazy and believe the and you deserve an A+ for this), at
TV and reading the financial press. propaganda that they’ve been fed this point in my life, I’m devoting my
which is that “you can’t time the energy to writing the GTA newsletter
How have the markets changed over market,” so they simply have a di- and consulting with my institutional
the past 50 years? versified portfolio and when things clients. I spend the rest of my time
In so many ways, and not all for go against them, they average down with my family.
the better! First, from commissions and so on. At the minimum, using a
being far too expensive to now where blackjack analogy, “when the deck I have probably another 50 ques-
they are pennies—and in many is no longer rich, you should simply tions I’d love to ask you, but this
cases, you can trade for free, which put your chips in your pocket and go interview has space limitations,
has encouraged people to “invest” away from the table and get a drink.” so I want to thank you very much
less and “trade” more (and, in many In stock market terms, that means to for your contribution to the field
cases, at a frenetic pace), which has move to a defensive position and hold of technical analysis over the past
increased volatility to a ridiculous de- a lot of cash and wait for the market 50+ years and wish you well going
gree. But even more important is the to get healthy once again. forward. Thank you for providing
electronic trading that has replaced your insights to our readers.
the specialists on the floor. While What do you think of the meme It has truly been my pleasure!
we know that in some cases there stock craze and the ability of young
were abuses with specialists, they traders to play the market using Leslie N. Masonson is president of Cash
nevertheless provided an important Robinhood or other brokerages at Management Resources, a financial
function with their books balancing no commission? consulting firm that focuses on ETF
supply and demand. Over the years, I’ve seen the market strategies. He is an active ETF and
But now, trades are done electroni- do an efficient job of dealing with Nasdaq futures trader, and the author
cally and instantaneous and this, too, “crazes” that come along, such as in of Buy—Don’t Hold and All About
has contributed to today’s frenetic the early 1970s when so many people Market Timing, as well as Day Trading
pace. All told, this, along with other bought into the idea that the “go-go” On The Edge. He writes a subscription-
changes, has led to far more trading stocks of that era (such as Avon, Pola- based monthly blog. He can be reached
and incredible volatility and much roid, Xerox, and many more) were “one at lesmasonson@yahoo.com.
less thoughtful investing. It shows decision” stocks—you only had to buy
up in the charts. A few decades ago, them and never sell them. Boy, was Further reading
there were nice slow saucer bottoms that a contrary opinion, as you know Weinstein, Stan [1988]. Secrets For
as stocks were accumulated, as well what happened to them in the following Profiting In Bull And Bear Mar-
as slow-evolving distribution at years. And I think the market will deal kets, McGraw-Hill.
tops. Now, in many cases, stocks go with this craze too and has a way of Edwards, Robert D., and John Magee
instantly from the “penthouse” to teaching “hot shots” a lesson. [1948]. Technical Analysis Of
the “outhouse” overnight, as well as Stock Trends, WHC Bassetti.
vice-versa. And this definitely doesn’t Do you have any plans to write
lead to healthy markets. another book on your investing
Algo Q&A
ALGORITHMIC TRADING
Have a question about system or algo trading? Kevin J. Davey has over
30 years of system trading experience. Kevin is a full time trader, and also
teaches and consults via his Strategy Factory® online workshop (https://
kjtradingsystems.com). He is the author of 5 bestselling trading books, in-
cluding “Building Winning Algorithmic Trading Systems” and his latest
book “Algo Trading Cheat Codes.” Send your questions or topic suggestions
to Kevin Davey at kdavey@kjtradingsystems.com. Selected questions will
appear in a future issue of S&C.
Kevin J. Davey
HOW MUCH WILL I MAKE? Interpretation of backtests is tricky. the “end point fallacy.” (See Figure 1.)
How do I know how much monthly Most people mistakenly think the bet- The trader primarily sees two points
income I can reasonably expect to ter the backtest, the better the real-time of a backtested equity curve—the
receive once I go live with my trading performance. In fact, many times it is starting equity and the ending equity.
system? I ask because my backtesting just the opposite; better backtests often The path in between gets ignored for
data looks pretty decent but any- produce worse real-time results. the most part. Yet that is the most
thing can happen when trading live. The point is, unless you’ve proven important part.
I just don’t want to get too excited. that your approach works in real time, Consider a strategy that earns
Thanks! you should be very wary of trusting $50,000 over five years. Sounds good,
You’ve brought up a lot of topics in your backtest results. Historical tests right? But what if I told you that on
your question, so I thought I’d address for strategies you are considering will the path to $50K, you had to endure
them one by one. always look good. That is precisely three drawdowns of $25K each. Now
why you are looking at them in the first it does not sound so good, does it? The
Monthly income place! But if good backtests alone were equity path matters!
Trading for monthly income can be the answer, every backtesting trader When you look closely at the
very stressful if you are relying on that would be a millionaire. Remember the topics of potential monthly income
income to pay your bills. Many people disclaimer, “past performance is not from trading, backtesting, and your
enter trading with no experience and indicative of future results.” trading expectations, it quickly be-
think they can just start trading (algo comes apparent that trading is not
or otherwise) and immediately start Tempered expectations a way to quickly and easily replace
making money. That is not the case When most traders review a backtest income from a “normal” job. It can
at all! Trading is a skill that can take or performance history, they do two take years to achieve success, and
years to develop. things. First, they envision a future even then the road can be rocky. For
Consider the annual percentage just like the past. If historically their those dedicated and willing to put
return you would need to meet the strategy earned $1,000 per contract in the time, success is possible. But
monthly income you require. If you per month, they may expect that to tempering your expectations at the
need to earn 1,000% a year to meet happen in the future. Yet that is rarely outset is smart.
your monthly income goals, you are the case. Historical backtests—even
probably going to fail. Also, think about when properly developed—are subject
the amount you are willing to lose along to survivor bias. Only the
the path to obtaining that annual return. good strategies survive, and
If you can only endure a 10% account those strategies probably
drawdown, your potential gains will had some good luck along
be limited. Why? Remember, risk and the way.
return are generally closely tied. If Luck during backtesting
you are not willing to risk much, your has a funny way of disap-
returns will likewise be limited. pearing (or worse yet, turn-
ing into bad luck) once the
Backtest looks good strategy goes live.
Don’t be fooled by a good-looking The second pitfall most FIGURE 1: EQUITY CURVE. Most traders only look at start and
backtest. I have discussed this before. traders fall into is what I call end equity points and ignore the drawdowns along the way.
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
WHAT IS A GAMMA SQUEEZE AND a one-point move in the underlying squeeze higher if the gamma begins
IS IT POSSIBLE IN COMMODITIES? asset. Both gamma and delta can be to explode. For every option transac-
Prior to 2021, the concept of option considered risk gauges. As gamma tion that takes place, there is a buyer
gamma and the potential of a “gamma and delta increase, the sensitivity and a seller. It is a zero-sum game,
squeeze” wasn’t on the radar of the of an option to the underlying asset ignoring transaction costs, which
average retail speculator. In fact, I increases. When gamma increases means if the buyer of the option is
would venture to assume the major- sharply, the option value can explode making money, the seller is losing
ity of those dabbling in the futures in value in a short amount of time. money and vice versa. The majority
markets believed gamma was a For instance, I have seen options in of retail speculators are generally net
Teletubbie. In the aftermath of wild WTI crude oil options valued at 50 option buyers, which means the other
rallies in heavily shorted stocks such cents ($500) with a delta of 0.10 (or side of the transaction is typically a
as GameStop and AMC, gamma one-tenth of full-sized contract) qua- market maker. A market maker is a
squeeze is a household concept and druple in value to $2.00 or $2,000 and trader whose goal is to add liquidity
the commodity markets have had the delta jumps to 0.65. As you can to the markets by quoting bids and
more than their fair share. imagine, this can wreak havoc on a asks for retail traders to provide
To understand how a gamma reasonable prices for them to execute
squeeze might occur, we must be options. If you have ever looked at
comfortable with a few definitions. Each time a plethora an option chain at a time in which
First, the delta of an option is the of call option buyers there are no market makers, you
ratio comparing the price change of aggressively bid options know they truly “make” the market.
an option relative to the change in higher, market makers Without their service, there is very
the price of the underlying asset. A would need to buy more little price transparency, and getting
futures contract has a delta of 1 while orders filled becomes a luxury, not
and more futures.
an option has a delta between 1 and an expectation.
zero. Thus, if the delta of a particular The goal of a market maker is to
option is 0.30, that option will behave trader’s account balance and mental profit on the high volume of trades
as if it is three-tenths of a futures well-being. Not only is the option while taking advantage of the dif-
contract. Put another way, if the suddenly losing $1,500 for the trader ference between the bid and the ask.
underlying futures market moves 10 but it is now behaving as if it were The price traders can buy at (the
points, an option with a delta of 0.30 six-tenths of a futures contract rather ask) is always higher than the price
would move three points. I should than one-tenth; thus, the position they can sell at (bid); the middle is
note, the delta of any particular option would become substantially more where a market maker makes a living.
fluctuates constantly as traders buy volatile and, of course, stressful. The However, on occasion, they must buy
and sell the two instruments. pace at which the delta jumped from or sell futures to hedge the options
The option’s gamma is a measure 0.10 to 0.65 is the gamma. risk on their book. For instance, if a
of the rate of change of its delta. Spe- Now that we have the basic defini- retail trader enters an order to buy a
cifically, it is a percentage reflecting tions out of the way, let’s take a look natural gas call with a delta of 0.25,
the change in delta in response to at why the underlying asset might the market maker might execute the
FUTURES FOR YOU
option trade by going short the same hundred lots. For the market maker tern becomes more erratic.
option to take the other side of the to manage the risk associated with The simplest explanation of a
trade and immediately purchase a filling the 100 lot call option trade, gamma squeeze is a situation in
mini futures contract. In natural gas, he would need to purchase 25 futures which excitement and volatility feed
a mini future is one-fourth the size of to get delta neutral. Now imagine if on itself, forcing market makers and
the original contract, which is what a large hedge fund was short thou- option sellers to buy futures con-
the options are written against; by sands of call options in natural gas tracts to hedge their price risk, not
doing so, the market maker achieves and needed to exit due to margin necessarily because they want to be
a neutral delta while he finds another pressure; at that point, the market long an already expensive market.
retail trader looking to sell the same maker might be forced to purchase This behavior repeats itself over and
option, which would allow him to several hundred futures contracts over until the overleveraged traders
offset the position. At that time, he to hedge his price risk. The natural are forced out of the market; this
would no longer need the mini future gas futures market can absorb large is when the buying frenzy dries up
hedge, so it would be offset immedi- orders, but motivated large lot buy- and prices collapse. Not only is this
ately, leaving the market maker flat ers can change the landscape, tempo, possible in commodities, but this
and ready for the next transaction. and flair emotions. Then, if you will, year has seen a shocking number of
During normal market conditions, imagine this cycle feeding on itself gamma squeezes. In 2021, we have
this goes on behind the scenes in an over and over. Each time a plethora seen such circumstances in copper,
orderly fashion. However, when vola- of call option buyers aggressively bid lumber, and lean hogs; later in the
tility jumps and retail traders begin options higher, market makers would year came the grains, coffee, and
to aggressively purchase call options, need to buy more and more futures. eventually natural gas. It is fair to say,
this dynamic changes. Imagine if Likewise, large traders, or groups of 2021 will be discussed and analyzed
instead of one lot of the aforemen- traders, who are holding short futures for years to come.
tioned call option being purchased or short call positions in natural gas

there were 10 lots, 20 lots, or even a would add fuel to the fire as the pat-
KAEPPEL of the cost of buying 100 shares of AAPL 135 Call 150 Call 160 Call
Continued from page 7 AAPL (that is, $1,513 to buy the Price % +(−) % +(−) % +(−)
135 call versus $14,819 to buy 100

173.19 +152 +378 +699
168.19 +119 +275 +396
shares of AAPL outright). 163.19 +86 +172 +93
curves for the ITM (135 strike) and 158.19 +53 +69 (−100)
OTM (160 strike) options. Finally, Figure 6 displays the ex- 153.19 +20 (−34) (−100)
148.19 (−13) (−100) (−100)
The differences are fairly stark. pected percentage profit or loss for 143.19 (−46) (−100) (−100)
The key tradeoffs to note are that the each strike price call based on the 138.19 (−100) (−100) (−100)
OTM call has: price of AAPL at expiration. The 133.19 (−100) (−100) (−100)
key things to note: 128.19 (−100) (−100) (−100)
123.19 (−100) (−100) (−100)
• Far less dollar risk
FIGURE 6: EXPECTED PERCENTAGE PROFIT
• Much higher profit potential on a • The 160 call offers the great- OR LOSS BY STRIKE PRICE. This displays the
percentage of cost basis est percentage profit potential if expected percentage profit or loss for each call’s
• Much lower probability of achiev- AAPL does in fact rally strongly strike price based on the price of AAPL stock at
option expiration. When deciding on which call
ing a profit in price to buy, it’s helpful to compare the profit/loss that
• However, note that if AAPL closed would result depending on the stock’s price at
On the other hand, the ITM call: at $153.19 at expiration, the: option expiration.
 In-the-money (135) call would

• Allows a trader to profit almost show a profit of +20% So, when deciding which strike price
dollar for dollar with the under-  At-the-money (150) call would to buy, it’s your call!
lying stock (above the breakeven show a loss of −34%
price of $150.13)  Out-of-the-money (160) call
• Allows the trader to pay a fraction would show a loss of −100%
PRODUCT REVIEW
VectorVest 7 Premium
Part 1: Daily Color Guard, Market Timing, UniSearch, and Stock Viewer
VECTORVEST, INC. ProfitLocker Pro component of the every bull and bear market over 25
20472 Chartwell Center Dr. VectorVest platform. Also in part years, not exact tops and bottoms, but
Cornelius, NC 28031 2 I’ll also discuss other VectorVest within a few days for their quicker
Phone: 888 658-7638 components including The Jockey timing models (known as the Primary
Internet: www.vectorvest.com Club, RoboTrader, Portfolio Genius, Wave and Green Light Buyer), a bit
System requirements: Microsoft RealTime Derby, BackTester, Watch- later for the DEW timer, and a few
Windows 10 with high-speed inter- Dog, and TradeNOW. weeks or longer for the slowest tim-
net. Mac Users: Cloud-based Paral- ing model (named Confirmed Call).
lels Client provided by VectorVest. VectorVest background This is information an investor can
Pricing plans: $69/mo. for “Basic” First, some background on the use to profit on the ride both up and
end-of-day service; $99/mo. for company: Company founder Bart down.
“Enhanced” streaming 15-minute DiLiddo first released the Vector- VectorVest has a worldwide follow-
delay; $149/mo. for “Premium” Vest ProGraphics system in 1995. ing with a growing subscriber base, a
real-time version. Market timing was the cornerstone well-trained staff, ongoing software
of its systematic, rules-based invest- enhancements and upgrades, and
by Leslie N. Masonson ing methodology. The software has add-ons. For example, VectorVest’s
T
been greatly enhanced over the years. RoboTrader add-on automatically
rading stocks has never DiLiddo earned a PhD in chemical routes orders to the customer’s bro-
been easier, more fun, or engineering from Case Western kerage firm (Ally Invest, Interactive
more affordable. But if new Reserve University and attended the Brokers, TradeStation, and Questrade
or experienced investors Sloan School of Management at the are currently available connections)
or traders learn the wrong approach Massachusetts Institute of Technol- for seamless execution. Moreover,
instead of educating themselves, the ogy. That background makes him using the ProfitLocker Pro add-on
results can be catastrophic mentally well-suited to developing mathemati- provides the user with a way to
and financially. Platforms that offer cal formulas to help answer those protect profits in a rising stock. I’ll
good educational components and three critical questions. cover more on these add-ons and
decision support can help, and that’s DiLiddo has said: “The single most others in part 2.
what this review will focus on. important thing to know is whether
VectorVest has a 30-year track re- the market is going up or down. Daily Color Guard
cord of providing high-quality market Everything else follows from that.” market timing system
timing and stock selection decision Market timing is by no means perfect, The heart of the VectorVest software
support for self-directed individuals. but it could allow you to capture the is the Daily Color Guard (DCG).
The vast majority of self-directed bulk (say, 75% or more) of up or down Figure 1 shows the homepage of Vec-
investors and traders need guidance moves while reducing the drawdown torVest, which can be rearranged with
in mastering the market and manag- of buy-and-hold investing, as the different data points and layouts. The
ing their portfolios in a responsible, market experienced two 50% or more DCG can be seen in the top middle of
non-emotional fashion. That is what declines in the 2000–2010 period. the page and is updated in real time
VectorVest has set out to offer, and VectorVest’s software (VV) offers (for real-time users) or every night
the software provides guidance and both slow and fast market timing sig- for end-of-day customers. Each of
support to the investor on the three nals for conservative and aggressive the data cells in the DCG changes
most important questions: when to investors. Individuals determine their colors—green, red, and yellow—like
buy, what to buy, and when to sell. risk tolerance, trading style, trading a traffic light, depending on values
Here in part 1 of this review, I’ll focus timeframe, and trading rules—all derived from specific data measure-
on the first two questions. Next time aspects of their trading. VectorVest’s ments. The DCG matrix, the daily
in part 2, I’ll address the last question timing models have accurately pin- market performance, and the “hot
of when to sell with coverage of the pointed the beginning and ending of stocks” for the next day are presented
each weekday night after 8 pm in a
10-minute video that is archived for
future viewing. The six key DCG
columns are:
1. Price of the VectorVest Composite

(VVC) index represents over 8,900
stocks that are equally weighted
and combined into this index that
is a very broad measure of the
market’s performance. A green
light is displayed when the price
is higher than it was five days ago
as well as the prior day, and a red
light if the conditions reverse.
FIGURE 1: VECTORVEST HOMEPAGE. The homepage can be changed from the default to provide
2. Relative timing (RT) measures the other information. However, the Daily Color Guard is usually placed front and center because of
short-term trend of the market. A its importance. Here, the DCG signals caution with three yellow lights for the last four days. This
number above 1.00 is bullish and screenshot was taken on July 26, 2021.
vice versa on a scale of 0 to 2.
3. Buy-sell ratio (BSR) provides the DCG will show three green
percentage of the stocks in their lights with trend Up/Up and
index that is rated by the software call C/Up indicating a bullish
as a buy or sell. Above 1.00 is bull- market in which positive tech-
ish and vice versa. nicals suggest buying.
4. Market timing index (MTI) is the • Neutral/not a time to buy
aggregation of the VVC, RT, and stocks—The DCG will show
BSR based on a proprietary for- three yellow lights with trend
mula. Above 1.00 is bullish and Up/Dn.
FIGURE 2: DEW MARKET TIMING SYSTEM.
vice versa. • Bearish time to avoid or sell
The buy signals are shown with green arrows,
5. Trend values are based on the VVC stocks—The DCG will show and sell signals with red arrows. (This example
and MTI. If the VVC price action three red lights with trend Dn/ was taken on August 16, 2021.) The DEW is
over the last five days is higher and Dn and Call C/Dn, indicating a popular intermediate choice of market tim-
the current MTI is above 1.00, then a bearish market suggesting ing system with a reasonable number of trade
signals. By comparison, the Primary Wave and
the trend is recorded as Up/Up, and shorting the market or going to Green Light Buyer timing models produce many
vice versa to get a Dn/Dn. cash, depending on user’s risk more signals.
6. Call indicates whether the Con- tolerance.
firmed Call (the slowest VV tim- • Caution—With this mode, the bearish during the red days where no
ing signals) is currently on a buy DCG will show a mixture of stocks are recommended for buying.
or sell signal. A Confirmed Call any two or more colors. Caution From that point forward the market
buy signal occurs when the VVC is urged, as the market may be improved to yellow, which indicates
rises for two consecutive five-day in a trading range with no im- caution. A change to all green in
periods and is confirmed by the mediate discernible trend. The subsequent days would be bullish.
BSR being above 1.00. A sell signal color mixture may tilt bullish or In VectorVest’s nightly 10-minute
is the opposite occurrence. bearish. For example, one green market update, the hosts always men-
light and two yellows suggest a tion that “market timing is of utmost
By monitoring the DCG daily, the mildly bullish market. importance.” In other words, know
user can readily assess the market’s the market’s direction before trad-
condition, which will be in one of In Figure 1 you see that the DCG ing or investing. Each night’s video
four modes: is solid yellow for the most recent reviews the latest Color Guard status,
four days, bouncing off five solid the condition of each of the different
• Bullish time to buy stocks—The red days. That means the market was market timing models, and a list of 10
“hot stocks” to consider for entry the looking for the Timers Conf. Call DEW Prim. Wave GLB B&H
next business day, as well as “tomor- fewest trades Percent Gain 17.7% 55.7% 43.4% 47.1% 70.40%
row’s headlines” including govern- on a yearly ba- Annual Return 11.3% 35.6% 28.1% 30.1% 45.00%
ment and economic reports being sis. Naturally, Max Drawdown 13.9% 12.8% 8.40% 17.3% 28.50%
issued the next day such as durable by design it is Winners 4 8 19 7 n.a.
goods orders, pending home sales, slower at sig- Losers 4 2 10 1 n.a.
FOMC statements, GDP and jobless na l i ng tops % Winners 50% 80% 63.30% 87.50% n.a.
claims, and many others. Users can and bottoms. FIGURE 3: COMPARISON OF FOUR VECTORVEST TIMERS. The Nasdaq
tune in each night as well as visit As the name Composite and specifically the Nasdaq 100 (QQQ) experienced a monster rally
past videos to see what was said on suggests, this and can lead to whipsaw signals using the timing models. Using the timers in
big down or up days and to become signal waits for conjunction with UniSearch strategies would provide better results.
attuned to how the DCG works. extra confir-
Users who plan to go long the next mation. The requirements for a CC
morning are cautioned to make sure are that the price of the VVC has
the trend remains up by 10 am the increased over a five-day period for
next morning before executing any two consecutive weeks, the price has
bullish trades or vice versa (if inverse increased over the prior day, and the
ETFs are recommended in a down- buy/sell ratio (BSR) is greater than
trending market). 1.00.
During the early 2020 market col-
When to buy: Selecting a lapse, the CC issued a sell signal on
market timer February 28 right near the market
Users select a timing system that is top. However, its May 18th buy signal
compatible with their trading time was very late compared to the March
horizon. The timing models vary ac- 23rd market low. That is why some
cording to the time needed to trigger VV users prefer to use a faster timer
based on the criteria. The fastest timer such as the GLB or Primary Wave
with the most signals is the Primary (PW) after a big decline to catch the
Wave timer. It triggers green or red rebound faster.
by evaluating the VVC price change For example, DEW had a sell on
over the latest five trading days. A February 24, 2020 four days after the
consecutive five-day price increase high, and its buy signal was on April
results in a green cell in the DCG 6, ten days after the bottom—clearly
and vice versa. faster than the CC. The Primary Wave
The intermediate-term timer is the issued a sell signal on February 21,
DEW (Figure 2), which tracks three 2020, two days after the market top,
technical indicators with specific followed by the March 25th buy
parameters—the detrended price signal. Both were on the money,
oscillator (DPO), envelopes, and a producing the most profitable timing
weighted moving average—and when results. However, the large number
all three meet their pre-set criteria, of PW signals throughout the year
they are marked as bullish. Similarly, may be unsettling for all but active
the other four timers (the Green Light traders.
Buyer or GLB, the GLB/RT Kicker, Regarding the signal frequency
the RT Kicker Combo, and the RTX during the period from late February
Kicker) are the second fastest and 2020 through July 26, 2021, here are
have other technical requirements the counts:
to trigger. FIGURE 4: UNISEARCH MAJOR CATEGORIES.
Here, the vast capability of UniSearch is shown
The Confirmed Call (CC) is the • Confirmed Calls: 6 buys and in summary form, breaking out all the categories’
slowest timer and is used by the 7 sells results in over 400 searches suitable for all types
most conservative investors who are • DEW: 8 buys and 8 sells of investors and risk levels.
• Primary Wave: 27 buys and that these comparisons do not use
27 sells any of the VectorVest UniSearch
• Green Light Buyer: 66 buys strategies or sell criteria, which is
and 7 sells where the software provides unique
value to both traders and investors. In
Obviously, most active traders use VectorVest, a strategy is always used
the Primary Wave timing model, and with a timer to generate a portfolio
less aggressive traders will find the and the results have been very good
DEW and Confirmed Call variations over time with smaller drawdowns.
a good compromise. These timers
alone do not beat buy-and-hold dur- What to buy—UniSearch
ing big bull runs with only a few stock analysis strategies
minor pullbacks. That’s because sell After determining when to buy based
signals during the market’s ascent on one of the timers of your choice,
degrade overall performance, as the next step is to decide what to
any upside performance before the buy. In order to select stocks for your
next buy signal is missed. However, consideration, VV uses a mathemati-
when corrections or bear markets cal approach to develop the criteria.
occur, the timers prove their value The three most important VV stock
in limiting losses. evaluation criteria are relative value
Figure 3 provides a comparison (RV), relative safety (RS), and relative
of four market timers using the timing (RT). RV measures a stock’s
backtester module with QQQ com- long-term price appreciation. RS
pared to buy-and-hold for QQQ for measures a company’s financial con-
the period January 2, 2020 through sistency and predictability of future
July 26, 2021. This starting date was performance. Lastly, RT measures the
selected on purpose, as it preceded direction, size, and changing aspects
the 34% decline into the March 23, of the stock’s price history. More de-
2020 low, and then had a spectacular tails about these items can be found
FIGURE 5: BOTTOM-FISHING AND CONSER-
runup, one of the fastest in history on their website and tutorials. VATIVE SEARCHES. Here, 19 bottom-fishing
to power to new highs. As you can The values of these three calcula- searches and seven conservative searches
see, all the timers did not perform tions are then combined into one are shown.
as well as buy-and-hold. However, master indicator appropriately la-
all the timers offered at least 50% beled “VST,” but with more weight on or ones that the user develops. The
lower maximum drawdowns than RT. This indicator, when arrayed in major search categories are shown in
buy-and-hold. the Stock Viewer or UniSearch tool, Figure 4. Figure 5 provides a more de-
Performing this same analysis over results in the top-ranked VST stocks tailed look at the bottom-fishing and
a five-year period from January 2, automatically appearing at the top of conservative search options. Other
2015 through July 26, 2021 shows each list, as VST descending is the options cover choices for aggressive
similar results with the QQQ buy- default sort upon strategy execution. or conservative investors, retirement
and-hold widely outpacing the timers All four values are on a scale of 0 to portfolio, prudent, short selling, and
by at least double the performance, 2 with 2.00 being the highest, similar others are technically focused such as
but with a maximum drawdown that to the scale for the MTI, RT, and BSR those for moving average crossovers,
was 68% higher than the highest in the DCG. Moreover, each stock is MACD and RSI overbought and over-
timer’s drawdown. Moreover, note assigned a buy, sell, or hold designa- sold levels, technical divergences,
tion every day, so users can easily see sector and industry, price deltas over
the cream of the crop or the dogs for days, weeks or months, bear market
New users are urged to potential shorting. beaters, candlestick bullish and bear-
use the loads of free The stock selection process is easily ish patterns, trends, and many more.
training available. accomplished by viewing and run- Figure 6 shows the search criteria for
ning any of 400 UniSearch strategies “hot stocks” and the top 10 stocks as
and save them. Technical support is
available if there are any questions
on how to set up a particular strategy.
On the other hand, many users may
decide that the pre-selected searches
are more than sufficient without mak-
ing any changes.
A fair number of the UniSearches
have the main default set as “VST
descending,” which brings the funda-
mentally and technically top-ranked
stocks to the top of the screen with
FIGURE 6: HOT STOCK SEARCH FOR AUGUST 13, 2021. Each nightly report lists hot stocks for the highest VST scores. With the
the next day’s consideration. Hot stocks are listed in the cherry-picking tab in UniSearch.
click of a mouse, all 8,900 stocks
are scanned for the selected search
criteria, then arrayed in order from the
highest to lowest VST values. They
can then be placed in a watchlist,
portfolio, or run as a QuickTest over
selected time periods to determine
their performance.
Figure 7 provides a QuickTest for
the top-10 stocks selected for the
Midas Touch search from May 26,
2021, the date of a Confirmed Call,
through August 13, 2021. This strat-
egy gained 12.39% versus 3.52% for
the VVC, clearly a solid performance.
A QuickTest is a straight buy-and-
hold comparison and does not contain
any risk control matters like stops,
which are very important. Clearly,
the 30% price decline in RFP and
18% decline in BKEP could have
been capped at 10% with a stop at
FIGURE 7: MIDAS TOUCH TOP 10 QUICK TEST. In 2.5 months, these Midas Touch stocks out-
performed the VVC by almost four times with eight winners and two losers without any intervention
that level, resulting in an even better
such as stop-losses. portfolio performance.
Let’s consider one popular bull-
of the August 13, 2021 close without averages, RSI, ADX, stochastics, Bol- ish-oriented UniSearch strategy—
going into an explanation of any of linger Bands and MACD crossovers, Russell 2000/RT—coupled with the
the data or search fields. specific support & resistance levels, four different timers (one at a time)
Moreover, the search parameters and average daily volume. Over 100 for the period shown in Figure 3
can be changed at the user’s direction VV data fields are also available from January 2, 2020 to July 26,
to include fundamental data points for search criteria. Also, there are 2021 to see how they performed.
such as growth rate, earnings yield, criteria for selecting or deselecting This strategy’s parameters include
P/E ratio, sales per share, price to sales any industry or sector data points. In a stock price greater than $1, daily
ratio, comfort index, dividend yield, essence, the search criteria capability average volume over 100,000, no
safety and growth, and sales. With the is massive and completely under the inverse ETFs or special ETFs, and
ProTrader add-on, technical factors control of the user. Users can also listed on major stock exchanges. I
can be embedded in any search such change any of the parameters of any used the backtester with a five-stock
as simple and exponential moving pre-set strategy or create their own portfolio, as well as stop criteria of
selling any position with a 50% gain or not, many of Timers Conf. Call DEW Prim. Wave GLB B&H
or a 10% loss to avoid big drawdowns the top traders Percent Gain 32.8% 165.3% 320.2% 228.4% 34.40%
and lock in any big profits. in the country Annual Return 21.0% 105.7% 204.8% 146.1% 22.00%
Figure 8 provides the results, dem- have a 52% or Max Drawdown 20.1% 21.6% 22.70% 22.7% 42.30%
onstrating that using this strategy, less win rate Winners 10 17 53 37 n.a.
three of the four timers provided at but still make Losers 30 27 124 10 n.a.
least a 4X better performance than a fortune. One % Winners 25% 39% 29.8% 35.7% n.a.
buying and holding the Russell 2000 ex a m pl e i s FIGURE 8: COMPARISON OF RUSSELL 2000/RT TO BUY-AND-HOLD.
index (34.4% return), all with a 50% trader Mark Three of the four timers outperformed the benchmark 4X or more with about
less maximum drawdown. The best M i n e r v i n i , 50% of the drawdown. Even the slowest timer was only worse by 1.6 percent-
performer was the Primary Wave who performs age points, but with less than 50% of the drawdown.
timer with a 320.2% return versus exce e d i ngly
only a gain of 34.4% for buy-and-hold well with a 48% win rate over de-
Additional Data Availability
with a drawdown of 22.7% versus cades with a risk-to-reward ratio at

View Stock News
43.2%, respectively, a difference of or above 2:1. (See my interview with View Full stock Analysis Report
86% lower drawdown. Although the him in the June 2020 issue of this View Historical Data
Confirmed Call performance was magazine.) View Stocks In Industry Group
only 1.6 percentage points worse I could have selected other strate- View Stocks in Business Sector
than buy-and-hold, its low maximum gies to compare against buy-and-hold Trade Now - Connect to Brokerage
drawdown of 20.1% versus 42.3% for of the Nasdaq Composite, S&P 500 or Trade Now - Manage Brokerages
the Russell 2000 was a significant Russell 2000 or any other major US Upcoming Dividend Dates
improvement. So, in essence, every stock market index, and the results Calculate Option Price
timer provided excellent results. would have been similar. I didn’t just QuickTest
Two additional factors need to cherry-pick the Russell 2000/RT for QuickFolio
be mentioned. First, the number of this example. Users can easily run Add to Portfolio
trades for the Primary Wave (PW) backtests to check out this informa- Add to Watchlist
was 177, much higher than for the tion during their trial period or after View Stock Graph
other timers by a large amount, as to see the value of market timing View Industry Graph
was the return. The GLB appears to coupled with strategy selection and View Sector Graph
be a better approach for traders who stop criteria. Layout
want fewer trades (47) with a solid re- Autofit all Columns
turn. However, with zero-commission “Viewers” offer more Print
trading commonly available, there is buying candidates Export to csv
no additional transaction cost for the In addition to UniSearch, which pro- FIGURE 9: STOCK VIEWER, ADDITIONAL
extra PW trades. vides many more searches than you DATA AVAILABILITY. From stock charts to
A second factor is the low percent- will ever need, there are additional news to viewing stocks in the same industry
and sector, to adding to a watchlist or portfolio,
age of trade winners with all the searches and systems available un- this viewer offers a wealth of data available with
timers—all less than 40%. The key der the viewers tab at the top of the a mouse click.
is not the percent of winners, but the homepage. Not only is there a stock
risk-reward ratio, which needs to be viewer, but also one for VV trading Crocs, NVDA, and perhaps some
at least 2:1 or 3:1 or higher for the systems, industries, sectors, market unfamiliar ones such as Camtek, Per-
strategy to show a profit. Believe it indexes, as well as for watchlists ficient Inc., and Ternium, all three of
(built-in or create your own), and which were up for the year by 63.1%,
ETFs. I’ll cover three of these. 101.4%, and 66.9% respectively while
VectorVest software
the S&P 500 gained 17.2%. These
offers both slow and Stock viewer stocks are the cream of the crop and
fast market timing This viewer provides a quick way to are available with one mouse click.
signals for conservative see all 8,900 stocks in the universe By right-clicking on any stock, you
and aggressive ranked in VST descending order as of can select from 20 different choices
investors. July 29, 2021. Familiar names include (Figure 9)—such as viewing news
Moderna, BioNTech SE, IDT Corp., on the stock, looking at historical
data, charting it, seeing stocks in
the industry or business sector, and
connecting to a brokerage firm for
seamless trading. You can then place
any or all of the stocks in a watchlist or
portfolio for tracking or as investment
candidates after carefully viewing the
stock chart to make sure it is trending
higher over time with a left to right
upward trend.
Trading system viewer

Another powerful viewer is the
trading system viewer (Figure 10),
which is a spreadsheet listing 88
FIGURE 10: TRADING SYSTEM VIEWER, AUGUST 2021. Sorting each column brings the top-
VV-selected trading systems with performing systems to the top of the screen. Then determine which ones show consistently top
multiple performance data columns. performance for further analysis with backtests and portfolio tracking.
Note that these systems are derived
from UniSearch strategies as the ba-
sis, but they all have been backtested
with buy and sell criteria with stops,
with unique stock criteria. Be aware
that any user-developed strategies
cannot be added to this viewer.
Moreover, 36 of these systems use
ProfitLocker stop criteria, one uses
ProfitLocker Pro (the latest addi-
tion to that add-on), and two use a FIGURE 11: ETF VIEWER, AUGUST 16, 2021. Almost 1,700 ETFs are sorted by VST descending
combination of ProfitLocker and order where any column can be sorted from high to low. Sorting average volume would bring top
stocks to the top for trader consideration.
ProTrader. ProfitLocker Pro will be
explained in part 2 of this review, as
it is an add-on module.
This viewer displays the perfor-
mance over periods less than one
year for pre-selected strategies. By
sorting the columns, the user can
make a list of the top performers
in each time period to look for
consistency. For example, sorting
on the one-year and year-to-date
columns brings up four systems FIGURE 12: TOP RT DESCENDING, SECTOR ASC. Here, the steel and instrument sectors are the
that are on the top of both lists: leaders with RT values above 1.13. Average volume is important for traders to keep in mind. Click
Thornton’s Thunder, Angels Wings, on the sector name for more analysis and charts.
Romancing the NPM, and Marijuana
Stocks DR. However, each of their This viewer provides users with
one- and three-month performance the ability to: Each night’s video
is not in the top 10. Comparing the reviews a list of 10 “hot
top UniSearch strategies with these • Select a conservative, prudent, stocks” to consider for
systems and finding common ground or aggressive approach the following business
provide searches with the highest • Compare the system to the re- day.
opportunity for success. sult of the best searches found
in UniSearch to look for com- Sector viewer There’s also a five-part “successful in-
monality Another excellent and quick way to vesting” quick-start course you access
• See a mini line chart of one-year search for potential buy candidates by clicking on the training tab, and
performance to find the smooth- is to view the top-performing sectors if you’re looking for more detailed,
est ride up from left to right based on relative timing out of the in-depth instruction, a navigation
• See the timer used 41-sector universe (Figure 12). Steel training series is available covering
• Find the ones with the lowest and instruments are the top two in all aspects of the program. Using
one-year drawdown the August 16, 2021 view. By clicking these assets will drastically speed up
• Ascertain the performance on the sector name, you can see the your learning curve. I’ll cover more
over five timeframes, which stocks in that business sector. In the educational tools in part 2.
can be sorted by best or worst case of steel companies, the top VST
performance stocks are Ternium SA, and Nucor. Until next time
• Observe the annual rate of In the instrument sector, the top two Here, I have covered some of the
return and the one-year percent- are Perkin Elmer and Danaher. components of the software that help
age drawdown investors with two of the three key
• Select which systems use Profit- Trial signup decisions that traders and investors
Locker or ProfitLocker Pro First-time users should consider need to make: when to buy and what
• View the trading system details signing up for a 30-day low-cost to buy. Next time in part 2, I’ll look
• Paper trade in a portfolio trial ($9.95 or $0.99 on occasion). at other key aspects of the program
• Trade with RoboTrader using a Surprisingly, VV offers new users the including the RealTime Derby, The
compatible brokerage firm Jockey Club, ProfitLocker Pro, and
the overall topic of when to sell, the
ETF viewer VectorVest has a 30- last of the three critical decisions.
This viewer (Figure 11) provides year track record of In the meantime, for more about
data on 1,700 ETFs with the standard providing high-quality the many tools and strategies in the
spreadsheet format. You will notice market timing and stock software, readers can revisit past
that ETFs have a fixed relative safety selection decision reviews of VectorVest in the Traders.
and relative value setting of 1.0. support for self-directed com article archive.
That is because only stocks can be
analyzed for those values. Moreover,
individuals. S&C Contributing Writer Leslie
columns not shown in Figure 1 are N. Masonson is president of Cash
zero-filled data columns for the same opportunity to test out the real-time Management Resources, a firm that
reason include EPS, EY, GPE, sales, version for $9.95, which normally focuses on ETF strategies. He is
sales GRT SPS, and P/S. costs $149 a month. By using the an active ETF and Nasdaq futures
However, RT can be calculated and trial option, the user can determine trader, and he writes a monthly sub-
results in the same order as the calcu- whether the VectorVest market tim- scription blog. He can be reached at
lated VST value. In other words, all the ing systems coupled with its stock lesmasonson@yahoo.com.
top RT ETFs are the top VST ETFs. In and ETF selection strategies offer
this horizontally shortened example, a compatible methodology to use. Further reading
the top five ETFs are GDXD, TECL, A monthly plan can be used going Gopalakrishnan, Jayanthi [2017].
TQQQ, EWUS, JJETF, SGGFF, forward and can be canceled with- “Bart DiLiddo Of VectorVest,
UGAZF, BOIL, CURE, AND NAIL out difficulty for any reason with no interview, Technical Analysis of
as of the August 18, 2021 close. Traders further cash outlay. Stocks & Commodities, Volume
would want to sort this list by average Once you’ve signed up online, 35: July.
daily volume to find the most liquid which takes a few minutes, you then Masonson, Leslie N. [2003] “Vector-
ETFs with presumably the smallest select a user identification and pass- Vest,” product review, Technical
bid-ask spreads. That sort brings the word, download the software, and Analysis of Stocks & Commodi-
following tickers to the top in order: you are ready to begin. New users are ties, Volume 21: June.
SQQQ, SPY, XLF, QQQ, EEM, XLE, urged to use the loads of free train- ‡VectorVest
IWM, TQQQ, EWZ, and VXX—all ing by first registering for their live
well-known tickers to active traders. “getting started” coaching webinar.
The focus of Traders’ Tips this month is At Traders.com you can also right-
John Ehlers’ article in this issue, “The click on any chart to open it in a new tab
MADH: The MAD Indicator, Enhanced.” or window and view the chart at a much
Here, we present the November 2021 larger size.
Traders’ Tips code with possible imple- The Traders’ Tips section is provided to
mentations in various software. help readers implement a selected technique
The code for the following Traders’ Tips from an article in this issue or another re-
selections is posted here: cent issue. The entries here are contributed
by software developers or programmers for
• Traders.com → S&C Magazine → software that is capable of customization.
Traders’ Tips
Filt2 = 0;
coef = 0;
F TRADESTATION: NOVEMBER 2021 TRADERS’ TIPS CODE
for count = 1 to LongLength
Last month in his October 2021 article in S&C, “Cycle/Trend begin
Analytics And The MAD Indicator,” John Ehlers presented Filt2 = Filt2 + (1 - Cosine(360*count / (LongLength +
the MAD (moving average difference) indicator, an oscillator 1)))*Close[count - 1];
coef = coef + (1 - Cosine(360*count / (LongLength + 1)));
developed out of his research into understanding cycles data end;
better. The MAD indicator effectively took the difference
between two simple moving averages. While the MAD is If coef <> 0 Then Filt2 = Filt2 / coef;
said to offer an improvement over the classic, well-known // Computed as percentage of price
MACD, the MADH (moving average difference with Hann) If Filt2 <> 0 then MADH = 100*(Filt1 - Filt2) / Filt2;
that Ehlers presents in his article in this issue, “The MADH:
Plot1(MADH, "MADH");
The MAD Indicator, Enhanced,” is said to offer an improve- Plot2(0, "Zero");
ment over the MAD indicator. The enhancement comes from
the utilization of the Hann windowing technique and takes A sample chart is shown in Figure 1.
the difference of two finite impulse response filters. Ehlers This article is for informational purposes. No type of trading
explains that excellent buy and sell indications can be seen in or investment recommendation, advice, or strategy is being made,
the indicator’s valleys and peaks, respectively. given, or in any manner provided by TradeStation Securities or
its affiliates.
Indicator: TASC NOV 2021 MADH —John Robinson
TradeStation Securities, Inc.
// TASC NOV 2021
// MADH (Moving Average Difference - Hann) Indicator www.TradeStation.com
// (C) 2021 John F. Ehlers
inputs:
ShortLength(8),
DominantCycle(27);
variables:
LongLength(20),
Filt1(0),
Filt2(0),
coef(0),
count(0),
MADH(0);
LongLength = IntPortion(ShortLength + DominantCycle / 2);

Filt1 = 0;
coef = 0;
for count = 1 to ShortLength

begin
Filt1 = Filt1 + (1 - Cosine(360*count / (ShortLength +
1)))*Close[count - 1];
coef = coef + (1 - Cosine(360*count / (ShortLength + 1)));
end;
FIGURE 1: TRADESTATION. This TradeStation daily chart of the continuous emini
If coef <> 0 then Filt1 = Filt1 / coef; S&P 500 shows the MADH indicator applied.

F THINKORSWIM: NOVEMBER 2021 TRADERS’ TIPS CODE
We put together a study based on the article by John Ehlers in
this issue titled “The MADH: The MAD Indicator, Enhanced.”
We built the strategy referenced by using our proprietary
scripting language, thinkscript. To ease the loading process,
simply click on http://tos.mx/zq1AI6I or enter it into the ad-
dress into setup→open shared item from within thinkorswim
then choose view thinkScript study and name it “MADH”
or whatever you like and can identify. You can then add the
FIGURE 2: THINKORSWIM. This sample chart shows the MADH study added to a
strategy to your charts from the edit studies menu from within one-year daily chart of SPY.
the charts tab and then select studies.
The chart in Figure 2 shows the study added to a one-year
daily chart of SPY. Please see John Ehlers’ article for more
information on how to utilize the study.
—thinkorswim
A division of TD Ameritrade, Inc.
www.thinkorswim.com
F eSIGNAL: NOVEMBER 2021 TRADERS’ TIPS CODE

For this month’s Traders’ Tip, we’ve provided the study Moving
Average Difference - Hann Indicator.efs based on the article
in this issue by John Ehlers titled “The MADH: The MAD
Indicator, Enhanced.” This study offers an improvement over
the classic MACD study by Gerald Appel by optimizing the
lengths of the moving averages.
The study contains formula parameters that may be con-
figured through the edit chart window (right-click on the
chart and select “edit chart”). A sample chart is shown in FIGURE 3: ESIGNAL. Here is an example of the study plotted on a daily chart of
Figure 3. SPY.
To discuss this study or download a complete copy of the
formula code, please visit the EFS library discussion board block or use the sample code provided below.
forum under the forums link from the support menu at www.
esignal.com or visit our EFS KnowledgeBase at http://www. System rules
esignal.com/support/kb/efs. The eSignal formula script • Enter when the MADH indicator turns up (that is, its
(EFS) is also available for copying & pasting from this mag- value increases after a decline)
azine’s website at Traders.com in the Traders’ Tips section. • Exit when the MADH indicator turns down (that is, its
—Eric Lippert value decreases after an advance)
eSignal, an Interactive Data company
Figure 4 illustrates application of the MADH to a chart
800 779-6555, www.eSignal.com
of SPY.
CODE
using WealthLab.Backtest;
using System;
using WealthLab.Core;
F WEALTH-LAB: NOVEMBER 2021 TRADERS’ TIPS CODE using WealthLab.Indicators;
using WealthLab.TASC;
We have added John Ehlers’ MADH indicator to Wealth-Lab using System.Drawing;
7 for the convenience of our users. In his article in this issue, using System.Collections.Generic;
Ehlers suggests that the valleys and peaks of the indicator can
namespace WealthScript1
signal buy and sell opportunities. To test this trading idea, {
Wealth-Lab users can simply add the “indicator turns” building public class MyStrategy1 : UserStrategyBase

{
/* create indicators and other objects here, this is ex-
ecuted prior to the main trading loop */
public override void Initialize(BarHistory bars)
{
mad = MAD.Series(bars.Close, 8, 20);
madh = MADH.Series(bars.Close, 8, 20);
PlotIndicator(mad, Color.Red, PlotStyles.Line, false,

"MAD");
PlotIndicator(madh, Color.Yellow, PlotStyles.Line,
false, "MADH");
ChartDisplaySettings cds = new ChartDisplaySet-

tings();
cds.ColorGridLines = Color.Transparent; FIGURE 4: WEALTH-LAB. This chart shows an example of trade signals produced
cds.ColorWatermark = Color.White; by the system if applied to a daily chart of SPY.
cds.ColorUpBar = Color.Green;
cds.ColorDownBar = Color.Red;
cds.ColorBackground = Color.Black;
SetChartDrawingOptions(cds);
SetPaneDrawingOptions("MAD", 20, 50);

SetPaneDrawingOptions("MADH", 20, 51);
}
/* execute the strategy rules here, this is executed once

for each bar in the backtest history */
public override void Execute(BarHistory bars, int idx)
{
if(madh.TurnsUp(idx))
PlaceTrade(bars, TransactionType.Buy, OrderType.
Market);
if (madh.TurnsDown(idx))
ClosePosition(LastPosition, OrderType.Market);
}
/* declare private variables below */

MAD mad; MADH madh; FIGURE 5: NEUROSHELL TRADER. This NeuroShell Trader chart shows the MAD
} and MADH indicators.
}
support website to download a copy of this or any previous
—Gene Geren (Eugene) Traders’ Tips.
Wealth-Lab team —Ward Systems Group, Inc.
www.wealth-lab.com sales@wardsystems.com
www.neuroshell.com
FN EUROSHELL TRADER: NOVEMBER 2021 ®

TRADERS’ TIPS CODE
John Ehlers’ MADH indicator, presented in his F OPTUMA: NOVEMBER 2021 TRADERS’ TIPS CODE
article in this issue, can be easily implemented in NeuroShell In his article in this issue, “The MADH: The MAD Indicator,
Trader using NeuroShell Trader’s ability to call external Enhanced,” John Ehlers introduces his MADH indicator. To
dynamic linked libraries. Dynamic linked libraries can be calculate the MADH indicator in Optuma, you can wrap the
written in C, C++ and Power Basic. MAD formula in the prebuilt FIR() function available to all
After moving the code given in the article to your pre- clients with our Ehlers module (www.optuma.com/ehlers).
ferred compiler and creating a DLL, you can insert the re-
//Calculate MAD Oscillator;
sulting indicator as follows: //MA Inputs;
#$Short = 8;
1. Select “new indicator” from the insert menu. #$Long = 23;
2. Choose the external program & library calls category. //Calc MAD;
3. Select the appropriate external DLL call indicator. S1 = MA(BARS=$Short, CALC=Close);
L1 = MA(BARS=$Long, CALC=Close);
4. Set up the parameters to match your DLL. MAD1 =100 * ((S1 - L1)/L1);
5. Select the finished button. //Wrap MAD in the FIR Hann function to calculate MADH;
FIR(MAD1, SMOOTHSTYLE=Hann, BARS=20)
NeuroShell Trader users can go to the Stocks & Com-
modities section of the NeuroShell Trader free technical —support@optuma.com

F TRADERSSTUDIO: NOVEMBER 2021
The importable TradersStudio files based on
John Ehlers’ article in this issue, “The MADH: The MAD
Indicator, Enhanced,” 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 indicator is provided in following
files:
• F unction EHLERS_MADH: Computes MADH indi-
FIGURE 6: OPTUMA. This sample chart displays the MADH oscillator.
cator
• Indicator plot EHLERS_MADH_IND: Plots the
MADH indicator on a chart
A sample chart displaying the oscillator is shown in Fig-
ure 7.
Code:
'The MAD Indicator, Enhanced
'Author: John F. Ehlers, TASC Nov 2021
'Coded by: Richard Denning, 9/14/2021
Function EHLERS_MADH(ShortLength, DominantCycle)

'ShortLength=8, DominantCycle=27
Dim LongLength
Dim Filt1
Dim Filt2
Dim coef
Dim count
Dim MADH As BarArray
If BarNumber=FirstBar Then FIGURE 7: TRADERSSTUDIO. The MADH indicator is shown on a chart of Cisco
LongLength = 20 Systems Inc. (CSCO) during 2012.
Filt1 = 0
Filt2 = 0
coef = 0 EHLERS_MADH = MADH
count = 0 End Function
MADH = 0 '------------------------------------------------------------------------------------
End If -------
'INDICATOR PLOT
LongLength = CInt(ShortLength + DominantCycle / 2) Sub EHLERS_MADH_IND(ShortLength,DominantCycle)
Filt1 = 0 Dim MADH As BarArray
coef = 0 MADH = EHLERS_MADH(ShortLength,DominantCycle)
For count = 1 To ShortLength plot1(MADH)
Filt1 = Filt1 + (1 - TStation_Cosine(360*count / (ShortLength plot2(0)
+ 1)))*Close[count - 1] End Sub
coef = coef + (1 - TStation_Cosine(360*count / (ShortLength
+ 1))) —Richard Denning
Next info@TradersEdgeSystems.com
If coef <> 0 Then for TradersStudio
Filt1 = Filt1 / coef
End If
Filt2 = 0
coef = 0
For count = 1 To LongLength
Filt2 = Filt2 + (1 - TStation_Cosine(360*count / (LongLength
+ 1)))*Close[count - 1] F TRADINGVIEW: NOVEMBER 2021 TRADERS’ TIPS CODE
coef = coef + (1 - TStation_Cosine(360*count / (LongLength Here is TradingView Pine code for implementing the MADH
+ 1)))
Next
indicator (moving average difference with Hann windowing)
If coef <> 0 Then as presented by John Ehlers in his article in this issue.
Filt2 = Filt2 / coef
End If // TASC Issue: November 2021
If Filt2 <> 0 Then // Article: "Moving Average Difference with Hann Windowing
MADH = 100*(Filt1 - Filt2)/Filt2 (MADH)" by John Ehlers
End If // Language: TradingView's Pine Script
// Provided by: PineCoders, for tradingview.com

//@version=4
study("TASC 2021.11 - Moving Average Diff. with Hann
Windowing (MADH)", "MADH")
float sourceInput = input(close, "Source:")

int shortLengthInput = input(8, "Short Length:", min-
val = 2)
int dominantCycleInput = input(27, "Dominant Cycle:",
minval = 4)
madh(source, shortLength, dominantCycle) =>

var float PIx2 = math.pi * 2.0
float filt1 = 0.0
float coeffs = 0.0
for count = 1 to shortLength FIGURE 8: TRADINGVIEW. The MADH indicator is shown on a chart of the S&P 500 Index.
float hannCoeff = 1.0 - cos(PIx2 * count / (shortLength
+ 1))
filt1 += hannCoeff * source[count - 1]
coeffs += hannCoeff
filt1 := nz(filt1 / coeffs)
int longLength = int(shortLength + dominantCycle * 0.5)
float filt2 = 0.0
coeffs := 0.0
for count = 1 to longLength
float hannCoeff = 1.0 - cos(PIx2 * count / (longLength
+ 1))
filt2 += hannCoeff * source[count - 1]
coeffs += hannCoeff
filt2 := nz(filt2 / coeffs)
nz(100.0 * (filt1 - filt2) / filt2)
madhSignal = madh(sourceInput, shortLengthInput, domi-

nantCycleInput)
plot(madhSignal, "MADH", color.orange, 3)

hline(0, "Zero", color.gray)
FIGURE 9: ZORRO PROJECT. Here is the MADH indicator applied to SPY data from the
STOOQ website.
https://www.tradingview.com/x/aafx7kaN/
The indicator is available on TradingView from the Pine- For creating the MADH, we just glue both functions to-
CodersTASC account at: gether:
tradingview.com/u/PineCodersTASC/#published-scripts var MADH(vars Data, int ShortPeriod, int LongPeriod)
—TradingView {
https://www.tradingview.com return 100*(SMA(hann(Data,ShortPeriod),ShortPeriod)
/SMA(hann(Data,LongPeriod),LongPeriod)-1.);
}
Here is a script for replicating Ehlers’ chart in this issue of

F T HE ZORRO PROJECT: NOVEMBER 2021
the MADH using SPY data from the STOOQ website:
Last month in his October 2021 article in S&C, void run()
John Ehlers described his MAD indicator. In his article this {
StartDate = 20191201;
month, he presents the MADH oscillator, which is the MAD EndDate = 20210701;
enhanced with a Hann window applied. Here again is the code BarPeriod = 1440;
in C for Zorro for the MAD and Hann from previus issues.
assetAdd("SPY","STOOQ:*");
var MAD(vars Data, int ShortPeriod, int LongPeriod) asset("SPY");
{ plot("MAD",MAD(seriesC(),8,23),NEW,RED);
return 100*(SMA(Data,ShortPeriod) plot("MADH",MADH(seriesC(),8,23),NEW,BLUE);
/SMA(Data,LongPeriod)-1.); }
}
The resulting chart is shown in Figure 9.
vars hann(vars Data,int Length) The MADH oscillator and scripts can be downloaded
{
vars Out = series(0,Length); from the 2021 script repository on https://financial-hacker.
int i; com. The Zorro platform can be downloaded from https://
for(i=0; i<Length; i++) zorro-project.com.
Out[i] = Data[i] * (1-cos(2*PI*(i+1)/(Length+1)));
return Out;
—Petra Volkova
} The Zorro Project by oP group Germany
www.zorro-project.com

F NINJATRADER: NOVEMBER 2021 TRADERS’ TIPS
CODE
The MADH (moving average distance—Hann) indi-
cator, as discussed in the article in this issue by John
Ehlers, “The MAD Indicator, Enhanced,” is available
for download at the following links for NinjaTrader 8
and for NinjaTrader 7:
NinjaTrader 8: www.ninjatrader.com/SC/November-
2021SCNT8.zip
NinjaTrader 7: www.ninjatrader.com/SC/November-
2021SCNT7.zip
Once the file is downloaded, you can import the

indicator into NinjaTrader 8 from within the control
center by selecting Tools → Import → NinjaScript
Add-On and then selecting the downloaded file for
NinjaTrader 8. To import into NinjaTrader 7, from
within the control center window, select the menu
File → Utilities → Import NinjaScript and select the
downloaded file.
You can review the source code for this indicator
in NinjaTrader 8 by selecting the menu New → Nin- FIGURE 10: NINJATRADER. The chart displays the MADH indicator on the emini S&P 500.
jaScript Editor → Indicators from within the control
center window and selecting the MADH file. You
his previous articles in this series.
can review the indicator’s source code in NinjaTrader 7 by
By replacing the two moving averages used in the basic
selecting the menu Tools → Edit NinjaScript → Indicator
MAD indicator with two Hann windowing averages, we get
from within the control center window and selecting the
an indicator that is smoother as determined by looking at the
MADH file.
rate of change (ROC) of the original MAD and the enhanced
A sample chart displaying the indicator is shown in Fig-
MADH (see Figure 11).
ure 10.
Ehlers suggests that “excellent buy and sell indications are
NinjaScript uses compiled DLLs that run native, not in-
at the valleys and peaks” of the MADH indicator. These val-
terpreted, which provides you with the highest performance
leys and peaks occur at the points where the MADH ROC
possible.
—Kate Windheuser crosses zero.
NinjaTrader, LLC ROC crossovers are a bit easier to see in Figure 12 with
www.ninjatrader.com the focus narrowed to approximately six months centered on
the March 2020 market downturn.
To explore the ROC crossover buy and sell indications,
F EXCEL: NOVEMBER 2021 TRADERS’ TIPS CODE scroll slightly to the right of the charts (shown in Figure 13)
In his article in this issue, “The MADH: The MAD Indicator, to see a one-share trading simulation.
Enhanced,” John Ehlers combines two concepts presented in The transaction summary tab (Figure 14) provides trans-
FIGURE 11: EXCEL. This shows a chart comparing MAD and MADH oscillators along with their respective ROC (rate of change) plots.

FIGURE 12: EXCEL. Here is a closer look at three months on either side of the March 2020 market downturn.
action details for the trading simu-

lation along with a few more statis-
tics for this trading simulation.
To download this spreadsheet:
The spreadsheet file for this Trad-
ers’ Tip can be downloaded from
www.traders.com in the Traders’
Tips area. To successfully down-
load it, follow these steps:
• Right-click on the link to the Ex-
cel file, then
• Select “save target as” to place
a copy of the spreadsheet file on
your hard drive.
—Ron McAllister
Excel and VBA programmer
rpmac_xltt@sprynet.com
FIGURE 13: EXCEL. This shows a trading simulation using zero crossings of the MADH ROC.
FIGURE 14: EXCEL. Here you can see the transaction summary tab for the trading simulation.

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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.
WHAT IS “GOOD TRADING”? am referring to the practice of using wisdoms abound on the topics of
What is important in trading? I’d sug- sound principles to go about your day. money and wealth.
gest it’s staying true to yourself and I am referring to those who wake up I’ll quote from the apostle Paul in
to your principles, just as with any earlier each day than the average the Christian Bible: “Godliness with
other pursuit in life. This, in the end, person just to prepare for the trading contentment is great gain.” In trading,
is more important than any trading day. And when the exchanges close “contentment” might mean that when
technique, strategy, or formula. for the day, they don’t necessarily in a trade, you must stop at some
Regardless of what religion you head out in their Ferrari for the high point if you have made enough profit.
may practice or even if you don’t life. In fact, I knew a 26-year-old Greed can turn a profit into a loss. In
practice any at all, I pose this philo- champion trader who still drove trading, you should know what you
sophical question to you: What emo- a second-hand car, and he said he expect and act accordingly.
tions are stirred up in you by trading, preferred to travel by train than by Don’t worry, I am not looking for
and are those feelings ones that you air as he found it more comfortable. new proselytes here. My aim is only
can live with? Do they comport with to suggest a layer of higher purpose
your beliefs and principles? What then is “good and spirituality to what we do every
Every morning, we wake up and in day in the markets. Paying attention to
whatever endeavor we pursue, we try
trading”? I am referring that could mean better management
to succeed. But in trading, we never to the practice of using of your emotions in trading.
think about our intentions. sound principles to go There’s a reason that all major
People often come to trading with about your day. religions talk about qualities such as
the goal of becoming rich. When you humility, charity, self-control, justice,
picture the life of a successful trader, Success doesn’t have to mean you piety—in reality, it’s about your rela-
what comes to mind first? Nice must buy fancy things just to show tionship with your own ego and with
cars, big houses, early retirement? to the world that you are successful the rest of the world.
Rarely do we think of successful in what you do. That isn’t necessar- Trading as a profession is not un-
traders as people who live average- ily congruous with what it takes to like being a doctor, a lawyer, a judge,
looking lives. But having met doz- practice good trading. a teacher, or any other labor of love
ens of blockbuster retail traders in Most of the world religions speak and money, from the most humble
my longtime journey as a trading to money and wealth and offer some ones to the most prestigious: they all
championship organizer, I will tell spiritual guidance surrounding it. involve keeping to some set standards
you that many a successful trader After all, money is inseparable from and ethical values.
comes across like an “average Joe” our day-to-day lives. In the Christian In the trading business, it’s good
rather than somebody we associate Bible, the gospels had quite a lot to to espouse a higher purpose than the
with luxury and wealth. Meanwhile, say about money—it is said that Jesus simple manual action of clicking the
when you talk to those who flash spoke more on money than on any buy and sell buttons on your platform.
glitzy possessions, you come to other topic. The Qur’an emphasizes Otherwise, “good trading” can turn
understand that they have nothing the importance of charity and keep- into greed, which could be your even-
in common with good trading. ing a good balance between spiritual tual downfall. Caveat emptor.
What then is “good trading”? I and concrete wealth. And ancient
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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 (Dec ’21) CME 5.7 11.2 2 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>>>>
Ultra T-Bond (Dec ’21) CBOT 3.7 13.6 4 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
10-Year T-Note (Dec ’21) CBOT 1.2 10.7 14 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
Russell 2000 E-Mini (Dec ’21) CME 3.1 5.4 2 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
Crude Oil WTI (Nov ’21) NYMEX 7.4 4.8 2 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
Nasdaq 100 E-Mini (Dec ’21) CME 6.2 10 1 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
5-Year T-Note (Dec ’21) CBOT 0.6 7.3 18 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
T-Bond (Dec ’21) CBOT 2.4 11.8 6 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
Ultra 10-Year T-Note (Dec ’21) CBOT 1.7 11 9 •••••••••••••••••••••••••••••••••••••••••••••••
Soybean (Nov ’21) CBOT 4.3 10.8 4 •••••••••••••••••••••••••••••••••••••••••••
Gold (Dec ’21) COMEX 5.2 16 4 ••••••••••••••••••••••••••••••••••
Soybean Meal (Dec ’21) CBOT 1.5 3.8 2 •••••••••••••••••••••••••••••••
2-Year T-Note (Dec ’21) CBOT 0.2 3.5 21 ••••••••••••••••••••••••••
Corn (Dec ’21) CBOT 8.6 19.3 17 •••••••••••••••••••••••••
Natural Gas (Nov ’21) NYMEX 8 10.6 4 ••••••••••••••••••
Gasoline RBOB (Nov ’21) NYMEX 7 8.4 3 •••••••••••••••
ULSD NY Harbor (Nov ’21) NYMEX 6.3 8.5 3 ••••••••••••••
Euro FX (Dec ’21) CME 1.7 18.2 15 •••••••••••••
Dow Futures Mini (Dec ’21) CBOT 5.7 11.9 2 ••••••••••••
S&P 500 VIX (Oct ’21) CFE 51.2 17.3 3 ••••••••••••
Sugar #11 (Mar ’22) ICE/US 6.7 12.4 17 ••••••••••••
Eurodollar (Dec ’21) CME 0.1 2.7 30 •••••••••••
S&P Midcap E-Mini (Dec ’21) CME 5.5 9.6 1 ••••••••••
Silver (Dec ’21) COMEX 13.1 27.2 4 ••••••••••
High Grade Copper (Dec ’21) COMEX 6.8 13.1 4 •••••••••
Coffee (Dec ’21) ICE/US 13.6 24.6 5 ••••••••
Cotton #2 (Dec ’21) ICE/US 5.9 11.7 8 •••••••
Wheat (Dec ’21) CBOT 7 16.5 13 ••••••
Australian Dollar (Dec ’21) CME 2.4 10 11 •••••
Crude Oil Brent (F) (Dec ’21) NYMEX 7 8.8 3 •••••
Hard Red Wheat (Dec ’21) KCBT 7.2 14.4 11 ••••
Live Cattle (Dec ’21) CME 3.4 9.5 11 •••• CBOT Chicago Board of Trade, Division of CME
British Pound (Dec ’21) CME 2.8 16.7 14 ••• CFE CBOE Futures Exchange
Japanese Yen (Dec ’21) CME 2 20.6 18 ••• CME Chicago Mercantile Exchange
Lean Hogs (Dec ’21) CME 6.4 11.7 11 ••• COMEX Commodity Exchange, Inc. CME Group
30-Day Fed Funds (Nov ’21) CBOT 0 1.8 20 •• ICE-EU Intercontinental Exchange-Futures - Europe
Bitcoin Futures (Oct ’21) CME 42.4 45.7 1 •• ICE-US Intercontinental Exchange-Futures - US
Canadian Dollar (Dec ’21) CME 1.9 13.5 18 •• KCBT Kansas City Board of Trade
Spring Wheat (Dec ’21) MGEX 7.2 14.6 9 •• MGEX Minneapolis Grain Exchange
Canola (Nov ’21) ICE/CA 8.6 16.7 22 • NYMEX New York Mercantile Exchange

Cocoa (Dec ’21) ICE/US 8.2 32.4 31 •
2111
Feeder Cattle (Nov ’21) CME 4.1 12.4 8 •
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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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
SYMPATHY PLAYS: A FRESH being in the same industry, which is Mergers

APPROACH WITH AN EDGE chemicals. The correlation coefficient Another fundamental reason for two
Most market participants are familiar for the past three months is 0.68. stocks to move together is mergers.
with correlations and how groups of The table in Figure 1 shows their When an acquirer offers stock or
stocks will move in unison. Often business segments. While they are stock plus cash for a target stock,
with significant market moves, most both dependent on chemicals and the contractual relationship or “deal”
stocks move directionally with the plastics, DD has greater exposure to that is formed aligns those stocks to
overall market. You may have heard the solar and semiconductor industries move together. The target stock takes
the saying “a market correlation of as well as to the construction industry. on the role of the lagging stock and
one,” which has been emphasized in DOW has more manufacturing and follows the acquirer up and down
certain seasons more than others. coatings exposure along with a weird with this invisible thread of the deal
The typical way that most would twist in insurance. These differences ratio, along with the arbitrageurs’
think about a utilizing a sympathy increase the uncorrelated risks and confidence (those who are trading/
play would be in taking a trade on a investing in it) that the deal is on
stock because another stock is on the solid ground.
move and the belief is that one should Without data, one might There is the risk that news to
follow the other—find a leader and think that stocks within the contrary may separate the two
trade the lagger. The trader may act the same sector should stocks, evaporating the deal premium
only on opinion, which is obviously move in lockstep, but that the target stock may be trading
not the best approach. It would be since there are many with. Mergers can impact other
better to have experience trading industries within each stocks within the industry that may
“related stocks,” and/or be equipped move in sympathy with the target
with correlation data to support those
sector, they are not all stock, shouting “me too, I might
decisions. aligned by correlations. be acquired one day.” The merger
Without data, one might think news announcement along with the
that stocks within the same sector lower the day-to-day correlation. subsequent indication of where the
should move in lockstep, but since Over the long sample, they do track target stock is trading prior to its
there are many industries within pretty well together, and a trader auction open provides traders with
each sector, they are not all aligned could still consider the leading versus time and opportunity to buy other
by correlations. Stocks within an lagging price action if one of the two related stocks in sympathy. Note that
industry may be pure plays, but some had meaningful news or movement. this is more of an initial behavior
have various business segments they
operate in. I have found through the DuPont de Nemours, Inc (DD) Dow, Inc (DOW)
years that stocks with overlapping
segments and correlated fundamental Electronics & Imaging Packaging & Specialty Plastics
risks move in line with each other to Transportation & Advanced Polymers Industrial Intermediates & Infrastructure
a high degree. Safety & Construction Performance Materials and Coatings
Here’s an example. One would
assume that Dupont (DD) and Property & Casualty and Reinsurance
Dow (DOW) would track together, FIGURE 1: SEGMENTS IN EACH COMPANY PROFILE
and opportunity out of the gate but
will fade in the weeks following
the news.
Other pair relationships

There are a variety of pair relation-
ships such as share class arbitrage
(which involves two or more stocks
of the same company); competitors
ESIGNAL
in the same industry; supply chain re-
lationships; master and limited part- FIGURE 2: 15-MINUTE CHART OF ETF UUP, WHICH TRACKS THE US DOLLAR
ners; and joint ventures. Like mergers,
pairs that have a fundamental anchor
between them will trade tighter, be
more elastic, and will exhibit the lead
and lag behavior.
There are also stocks with themes
that, for a season, track together.
We have witnessed this with meme
SYMPATHYTRADER
stocks and short squeeze candidates.
However, theme stocks are always
changing and this type of pair is not
FIGURE 3: SNAPSHOT OF SYMPATHYTRADER WEB-BASED SCREENER
as reliable as other more established
pair relationships.
Crutch trading is a form of This type of need has led to the
watching a lead stock and buying or A fallacy in trading is to development of the SympathyTrader
shorting a lagging stock. This style of trade the stock that is Screener OC. It is designed to help
trading is utilized in sympathy plays the most active, the one you figure out what stocks you could
with the intention to profit from a focus on and what the statistical edges
move by a lead stock but not trading
with news, or the one are. Knowing what the statistics edges
the lead stock itself. You are trading that gaps. are and having correlation data in
the lagging relationship. You can be hand provides insights and support
afforded the opportunity to hedge The predictors for trading decisions on sympathy
with the lead stock or another suitable I have another name for the big moves, plays.
relationship, which is why the term the leading indicators: the predictors. The idea is to focus on which
“crutch” is used. Again, to emphasize the point, I be- symbols to go long and short the
A fallacy in trading is to trade the lieve it is not helpful for the trader to current day and the next day, or in
stock that is the most active, the one trade the predictor but rather trade longer timeframes, depending on
with news, or the one that gaps. I the instruments it points to. the trader’s trading style. The goal
am not saying that the skilled can’t The traditional focus is to trade is to choose any stock or ETF as a
profit through this effort, but most the laggers the same day as the lead predictor and curate subsequent long
market participants can’t handle the or predictor. But my new approach and short ideas.
onslaught of the volatility or the news is to plan what I will trade tomorrow So for the USD example, you might
twists and turns that may be centered based on what happened today. want to find out which US-listed
around the story stock of the day. Say you witness a significant move stocks would be impacted by that
The seduction of the opportunity to happening in the US dollar (USD). move, and how they might move
trade the lead stock, the one with the You know the move in the USD is in the subsequent timeframes. You
news, is often like the “siren’s song” large enough to have impact, causing have a variety of timeframe choices
luring the trader into greater risk, as some stocks to move higher and some available, such as open to close (OC),
the sailors in Greek mythology were to move lower. You need to find out close to close (CC), or trades of longer
lured into the rocks and cliffs. what stocks to focus on. duration.
up MRO (Marathon Oil) as a short
candidate for the OC (open to close) As a trader, I can rely
of the next day, June 17, 2021. on past data to create
In Figure 4, you can see additional actionable trades for
results from the same screen that was tomorrow.
run. The results sorted by “odds less
than 50” indicate potential shorts. Finding edges: What is likely to
You can see there is a list of short move the next day?
opportunities generated, in keeping Simply put, statistics about what
with the subsequent odds, average happened in the past can give you
performance, and Sharpe ratio (I’ve insights into what may happen the
FIGURE 4: SNAPSHOT OF OPPORTUNITIES
FOR SHORTING ON JUNE 17 written before in this column on these next day or in the next timeframe. Of
metrics). For taking a short position, course, it won’t always predict with
you want average performance (Avg 100% accuracy, but it’s important to
Perf) to be negative as well as the look at it through the lens of statisti-
Sharpe ratio to be negative. cal probability.
Odds greater than 50 indicate I observe better results when the
the probability of moving up in the predictor has had significant and
specified timeframe. Figure 5 shows disruptive moves. This causes more
FIGURE 5: SNAPSHOT OF OPPORTUNITIES the results of sorting by odds greater adjustments from the investing com-
FOR BUYING ON JUNE 17 than 50. These symbols are stocks that munity.
could have been traded long from OC That being said, the goal of Sym-
In Figure 2, you can see an example on June 17, 2021. pathyTrader is to provide traders with
of a move that occurred in the USD This gives you an opportunity to information about what tends to move
on June 16, 2021, reflected here in the select advantaged longs in addition to in sympathy as well as what tends to
chart of UUP, an ETF that tracks the advantaged shorts. Having both long move the next day.
USD. As with other predictors, when and shorts working simultaneously There is a fundamental reason
the USD moves, people tend to adjust provides some protection from macro why statistical predictions are fairly
exposure the next day. market events that would move most accurate: it is the lag effect. It is no
Here’s how I curated the trade stocks in the same direction. different from the way the FOMC
based on this move. Figure 3 shows Figure 6 shows the list of the top (Federal Open Market Committee)
the web screen from June 16, 2021 six shorts and the top six longs that considers all the monetary and eco-
after the UUP day session close. I the predictors influenced for June 17, nomic data points before making a
placed my predictor, the UUP, in the 2021 and shows the outcome as to change in interest rates or monetary
“predictor” field and the percentage it whether the prediction was accurate. policy. They are drawing from past
moved. The SympathyTrader brought In this case, it was 100% accurate. and recent data. From that, they also
make assumptions about the future.
As a trader, I am not smart enough
to make assumptions, but I can rely on
past data to create actionable trades
for tomorrow. I gather intelligence
the night before about what stocks
to go long and which stocks to go
short. I use the experience I have in
trading related stocks, and I want to
be equipped with correlation data
to support my decisions. This is an
edge. Again, it is probability-based,
not guaranteed.
FIGURE 6: RESULTS OF PREDICTIONS FOR TOP 12 SYMBOLS GENERATED FOR
TRADING OPEN TO CLOSE ON JUNE 17

The TraderS’ MagaZINe SINCe 1982 www.traders.com JuNe 2019
THE TRADERS’ MAGAZINE SINCE 1982 www.traders.com SP BONUS ISSUE 2019 the tRaDeRs’ MagaZine since 1982 www.traders.com May 2019
EC
IAL
The Traders’ MagaZine sinCe 1982 www.traders.com MarCh 2019 TR The Traders’ MaGaZine sinCe 1982 www.traders.com aPril 2019
AD
ER
S’
ISS
UE
Model The MarkeT

The 21sT-CenTury WITh a FourIer The BesT CharT
Covered Call SerIeS INdICaTor Backtesting a PaTTern enTry
How to kill two birds Capture cyclic activity 8
Mean-ReveRsion Better entry timing? 6
with one option 8 stRategy in Python
Here’s a step-by-step guide 8 adaPTive eMa
does hisTory eleCTIoN eFFeCTS oN An indicator to help know
repeaT iTself? The SToCk MarkeT DouBle BottoM when a trend is a trend 10
Looking for time-based And how you can play it 18 PatteRn: selling
patterns for a trading edge 12 inerTia & MoMenTuM
The V-Trade eaRlieR? in The MarkeT
Trading Different exit scenarios 16 A different perspective 16
Part 11: Expert
The fakeouT manual trading 26
Keep an eye on these a visual inDicatoR a reliaBle seT
winning patterns 18 Instant, multi-timeframe of TeChniCal
INTerVIeW trend detection 22 indiCaTors
inTerview Talking volatility with Try this simple set 22
Claudio Demb and John Bollinger 36 inteRvieW
the psychology of trading 34 inTervieW
Creating trading strategies
Breakaway gaps
TradINg MISTakeS with David Pieper 30 Linda Bradford Raschke 30
Testing them for reliability To aVoId The v-Trade

and profitability 38 Be mindful of these 44
the v-tRaDe
Part 10b: Expert Part 10: Trading with
trading system 36 leverage 38
reVIeW
n The 3S Code
MARCH 2019 APRIL 2019
BONUS ISSUE 2019
DISPLAY UNTIL 10/31/2019 MAY 2019
JUNE 2019
Also in this issue: ■ A Challenging Year
■ What’s Controlling The Market? ■ The US Long Wave Revisited
■ The Kondratieff Wave Revisited ■ Forecasting A Market Recovery
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THE TRADERS’ MAGAZINE SINCE 1982

www.traders.com NOVEMBER 2021

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4 • November 2021 • Technical Analysis of Stocks & Commodities

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November 2021 • Technical Analysis of Stocks & Commodities • 15

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November 2021 • Technical Analysis of Stocks & Commodities • 25

Market Technician, Creator Of Stage Analysis Model,

and simply read the newspapers and

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135 call versus $14,819 to buy 100

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