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TRADING HIGH-YIELD
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EMAS
From simple to complex 8
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CHANGES MATTER
Or are they just noise? 24
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Looking for repeatable
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CRYPTOCURRENCIES
AND SEASONALITY
Part 2: Crypto winter 34
FEBRUARY 2023
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CONTENTS FEBRUARY 2023, VOLUME 41 NUMBER 2
6 Day Trading the 10am Reversal

by Ken Calhoun
The Traders’ MagazineTM Professional traders are always on
the lookout for chart patterns that
repeat. An easy one to recognize is
EDITORIAL
editor@traders.com the daily 10am reversal pattern.
Editor in Chief Jack K. Hutson
Production Manager Karen E. Wasserman FEATURE ARTICLE
Graphic Designer Wayne Shaw 8 Trade High-Yield Bond Funds
Webmaster Han J. Kim Using EMAs—From Simple To 29 Futures For You
Contributing Editors John Ehlers,
Anthony W. Warren, PhD.
Complex by Carley Garner
Contributing Writers Thomas Bulkowski, Martin Pring,
by Ken Huck & Nelson Huck Here’s how the futures market
Barbara Star, Markos Katsanos, Leslie N. Masonson, High-yield bond funds can provide really works.
Karl Montevirgen stock equity-like returns with
significantly less volatility and 30 Improving Trading Systems
significantly smaller drawdowns. By Counting Events
OFFICE OF THE PUBLISHER Exponential moving averages by David Bergstrom
Publisher Jack K. Hutson (EMAs) are a popular way to trade
It’s a simple concept that you may
Industrial Engineer Jason K. Hutson
these funds and strategies can range
Project Engineer Sean M. Moore not have thought of. Find out how to
from very simple to complex. Read
implement it.
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http://www.traders.com
Staff members may be emailed using first initial
plus last name plus @traders.com 38 The Savvy Technician
by Stella Osoba, CMT, Esq.
Authorization to photocopy items for internal or personal 18 The Outside Bar: A Rare And Recognizing and applying technical
use, or the internal or personal use of specific clients, is grant- Powerful Filter chart patterns to trading.
ed by Technical Analysis, Inc. for users registered with the
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Service, provided that the base fee of $1.00 per copy, plus Some price patterns can be used 41 Explore Your Options
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The Traders’ Magazine™, is prepared from information 24 Do Small Price Changes Matter 51 Futures Liquidity
believed to be reliable but not guaranteed by us without 52 Classified Advertising
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Opinions expressed are subject to revision without noti- by Perry J. Kaufman
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Can trend trading be improved by
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4 • February 2023 • Technical Analysis of Stocks & Commodities

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TRADING ON MOMENTUM
Buying The Pivot In An Intraday Pattern
Daytrading The 10am Reversal

Professional traders are always on SPY, QQQ, or leveraged ETFs such Step 2: If markets are trending up
the lookout for chart patterns that as SQQQ and TQQQ. The trader from 9:30–10am, put in a buy-stop
repeat. An easy one to recognize is simply puts in a buy order for the entry for an inverse ETF like SQQQ
the daily 10am reversal pattern. ETF to capitalize on the upcoming at $0.50 above the current price.
move. In looking at Figure 1 (SQQQ,
by Ken Calhoun ProShares UltraPro Short QQQ), Step 3: Alternatively, if markets are
C
you can see that buyers came in and trending down from 9:30–10am, put
arefully look at any major index price action reversed to the upside in a buy-stop entry for a long-bias
chart over the past year (S&P, at 10am. ETF like TQQQ at $0.50 above the
NASDAQ, Dow, Russell); current price.
you’ll see that markets often Step-by-step action plan
reverse direction near 10am daily, Here’s how you can start using this Step 4: Trail a stop of no more than
give or take a few minutes. strategy: $0.50 as it moves up.
Here, I’ll describe a strategy for day-
trading the 10am reversal pattern. Step 1: Determine if markets are
trending up or down during the It’s simply an established
Trading strategy for the 9:30–10am timeframe. Note that pattern used by major
10am pivot if it’s a choppy directionless open, institutions as well as
A sensible strategy involves trad- this strategy cannot be used. HFT algos.
ing index-related ETFs, like the
eSIGNAL
FIGURE 1: TRADING THE 10AM REVERSAL WITH SQQQ. This shows an example of buying the pivot as price action moves up.
Why this technique works Trade management tips For example, in Figure 1, the initial
As with many consistent market It’s useful to remember that the downtrend range was ($50–$48.5)
patterns, it’s simply an established duration of this trade, when entered = 1.5 points, so the exit target on a
pattern used by major institutions as near 10am, is often no longer than pivot entry at $48.8 is ($48.8 + $1.5)
well as high-frequency trading (HFT) 20 minutes. Those 20 minutes are = $50.3, which worked.
algos. I think of it like a 200SMA enough to capture most of the move.
line type of effect—it works because I will often diversify with this trade. Ken Calhoun moderates a popular
so many others trade it as well. Note For example, after an opening market live trading room for active traders.
this pattern does not occur at precisely rally, I fade the trend at 10am with He is the founder of TradeMastery.
10am daily; I look to trade it between several inverse ETFs, including com, an interactive webinar site
9:55–10:05am, the timeframe in SQQQ, SOXS, and UVXY. for active traders and is a UCLA
which it often occurs. Exit targets are a price projection of alumnus.
the earlier 9:30–10am trading range.
ERRATA: SHORT-TERM CONTINUA- the zero line. duplicate the correct formulations
TION AND REVERSAL SIGNALS A second formula references the despite the missing information. I
DMI oscillator. It will allow users admire their professionalism.
to change the indicator color of the
histogram when it is above the zero Continuation signals
line and when it is below the zero line, text clarification
as I have done in the article. In addition, I would like to make a
The MetaStock indicator is named clarification to the article text under
“DMI Oscillator Above or Below the subheading “Continuation sig-
Zero.” The formula for those who nals” to indicate the condition for the
wish to replicate the colors I used in blue circles in regard to price.
Editor, the article is as follows: At the bottom of page 10, the
I received an email from an astute If(Fml("DMI Oscillator")>=0, paragraph should read: “After a
S&C reader who spotted an important Fml("DMI Oscillator"),0); pullback in an uptrend, blue circles
omission from the formula code in my If(Fml("DMI Oscillator")<=0, appear under the price bar when both
Fml("DMI Oscillator"),0);
article “Short-Term Continuation and the DMI oscillator is above its zero
Reversal Signals,” which appeared in Once it is plotted on a chart, change line and price is above an 18-period
the December 2022 issue of S&C. I the line style to histogram. simple moving average. Dark red
had inadvertently left out the Meta- Click on the histogram above the circles appear above the price bar in a
Stock formula for the DMI oscillator, zero line and select a color for the downtrend after a minor retracement
which is the basis for one of the other DMI indicator above zero. when the DMI oscillator is below
formulas in the article. Click on histogram below the zero its zero line and price is below an
The missing indicator formula is line and select a color for the DMI 18-period moving average.”
named “DMI Oscillator.” To use it indicator below zero. BARBARA StAR
in MetaStock, in the formula builder, All the other formulas presented in
type in: the “Code For Indicators” sidebar on
PDI(10)-MDI(10) page 14 of the December 2022 issue
are accurate.
It plots as a line that crosses above My thanks to the code writers with
and below a zero line. The line style the various platforms who contrib-
can be changed to a histogram style uted to the Traders’ Tips section in
but the indicator will be the same the December 2022 issue based on my
color whether it is above the or below article, who were able to create and
February 2023 • Technical Analysis of Stocks & Commodities • 7
TRADING TECHNIQUES
An Exponential Moving Average Strategy
Trade High-Yield Bond Funds

Using EMAs—From Simple
To Complex
High-yield bond funds can provide stock equity-like this article will look briefly at both high-yield bond
returns with significantly less volatility and sig- ETFs and CE funds.
nificantly smaller drawdowns. Exponential moving
averages (EMAs) are a popular way to trade these Historical data
funds and strategies can range from very simple to We used a HY bond index to develop the strategies.
complex. Read on for an approach you can use. There are a large number of HY bond indexes to
O
choose from, and we decided on Bank of America
ne of the most common methods that inves- Merrill Lynch High Yield B Total Return Index. Our
tors use to trade high-yield (HY) bond funds analysis used the Investors FastTrack (www.fasttrack.
is with moving averages. Effective trading net) database, which contains end-of-day, dividend-
signals can be built using simple moving aver- adjusted data on more than 260+ open-end HY funds,
ages (SMAs), exponential moving averages (EMAs), and we found that this index (FastTrack ticker MLB-)
or short/long dual EMA crossover (S/L EMAs—some has a correlation of 0.93 and a beta of 1.0 compared
refer to them as fast/slow EMA crossovers). to the average of the basket of 260+ funds. One minor
In this article, we will limit ourselves to EMAs and issue is that this index has a start date of 12/31/1996
begin with a simple EMA strategy and work toward in the database, which isn’t unexpected because the
more complex strategies that take into consideration HY bond market didn’t really take off until the 1990s;
common trading restrictions on HY funds. however, we used the average data from the basket
Our goal is to create a general-purpose strategy of 260+ funds to create synthetic data to extend this
that an investor can use to trade their favorite HY data back to 9/1/1988. This gave us an additional seven
fund or family of HY funds. Investors can also use years of data to test. We adjusted the average of the
our methodology and modify it to meet their unique basket of funds data using the technique described
objectives. in our March 2020 S&C article, “Creating Synthetic
We want this strategy to trade well against a large Historical Data.” Trading systems developers don’t
basket of open-end HY bond funds. The reason for agree on how much historical data to use. Some ar-
using open-end funds, and not HY ETFs is, to quote the gue that markets have changed and only use recent
bank robber Willie Sutton, “That is where the money historical data, and others make the case for using as
is.” Simply put, the majority of individual investors much historical data as possible. We tend to be in the
hold their HY bond investments in open-end funds, second camp, but we did take a brief look at using
and we have found that the performance is better only more recent data.
FUNTAP/SHUTTERSTOCK
using our strategy with managed open-end funds To be clear, the signals developed have a one-day
and not as successful with ETFs; however, leveraged delay. In other words, if there is trade after the mar-
closed-end (CE) HY bond funds do have merit, and ket closes on a Tuesday, the signal would indicate a
by Ken Huck & Nelson Huck

trade Wednesday and receive Wednesday’s closing price
on the trade.
From 12/29/1989 to 7/12/2021 our extended index had a
buy & hold (B&H) annual total return of 6.7% with a daily
maximum drawdown (MDD) of 36.4%. For comparison, the
S&P 500 total return was 10.4% with a 55.2% MDD.
Simple EMA strategy

A few words about EMAs. We often think that EMAs
need to use “integer” number of days, that is, 5, 6, 10, etc.
However, you can actually use fractional days using the
following form: FIGURE 1: RESULTS USING A SINGLE EXPONENTIAL MOVING AVER-
AGE FOR TRADING SIGNALS (12/31/1988–7/12/2022). The simple
Et = Et-1 +a (Pt−Et-1) EMA strategy purchases a high-yield (HY) bond fund when the index (here,
the Bank of America Merrill Lynch High Yield B Total Return Index [MLB])
crosses above its EMA. The strategy moves the money to a money market
where: fund (VMFXX) when it crosses below the EMA. The results of this strategy
using an EMA with a lookback in a range of 10–150 days are shown here.
Et and Et-1 = Today’s and yesterday’s exponential This demonstrates the robustness of a wide range of parameters for an
EMA trading system.
smoothed values
Pt = Today’s price
a = The smoothing constant
a = 2/(n+1)
where n = number of days for the EMA. Note: n isn’t re-
quired to be an integer for the formula to work. We will
explain later in the article why we considered fractional
values for n.
Simple EMA strategy

The simplest EMA strategy is to purchase the HY fund
when the index moves above its EMA and sell to money
market (VMFXX) when it moves below the EMA. The FIGURE 2: RESULTS AFTER ADDING A 30-DAY MINIMUM HOLDING
results of this strategy for a range of 10–150 days in our PERIOD (12/31/1988–7/12/2022). Here, the same strategy as in Figure 1 is
EMA are shown in Figure 1. used except this time a 30-day minimum holding period is applied to take into
Looking at the results in Figure 1, the graph shows the account trading frequency restrictions on the bond fund that the trader may
robustness of a wide range of parameters for an EMA encounter. The results are still quite good using an EMA of 18–31 days.
trading system. We may be tempted to call it a day, and

go with an EMA between 10 and 35 days. An annual re- mum period—often 30 days. The results in Figure 1 didn’t
turn of 12% and an MDD in the 4–6% range is excellent place any restrictions on trading frequency or minimum
by any measure. It exceeds B&H of the S&P 500 with a holding period. If we apply a 30-day minimum holding
small fraction of the MDD. However, there a significant period, we get the results in Figure 2.
problem: Most HY bond funds frown on high-frequency The results in Figure 2 are still quite good using an EMA
trading and often require holding a fund for some mini- of 18–31 days with annual returns of approximately 10%
and MDD in the 13–18% range. A few observations: Some
HY bond traders use a 50-day moving average. Note that
there is a sweet spot in Figure 2 in the 45–50 day EMA
Our goal is to create a general- range. Also, as we mentioned earlier, some argue for using
purpose strategy that an investor only recent historical data for strategy development. We
can use to trade their favorite HY looked at a graph similar to Figure 2 but used only data
fund or family of HY funds. since 2007. The results were similar with good performance
in the 15- to 35-day EMA range.
What if we used a dual EMA crossover strategy, with
both a short-term and long-term (S/L) EMA? We will not
go into detail, but the results are shown in Figure 3. The
results from using a S/L EMA strategy are very similar to
the single EMA. This is because the optimum short-term
EMA is 1 to 3 days. If the short EMA is 1 day, the S/L
EMA system is equivalent to the simple EMA system. The
optimum longer-term EMA is in the 19–24 day range.
But there is a problem. The 30-day minimum hold can
occur at random. For example, if you were unfortunate
enough to purchase a HY fund just prior to the March
2020 Covid selloff you would have held the fund right
through the index exact bottom. Figure 4 is an example
of a strategy that went long on February 5 and sold at the FIGURE 3: RESULTS USING A DUAL EMA CROSSOVER STRATEGY
index’s (MBL-) absolute minimum on March 23. (See the (12/31/1988–7/12/2022). Here, results are shown for using a dual EMA
line labeled “locked” in green.) This resulted in a 19% crossover strategy, with one short-term and one longer-term EMA lookback
MDD. The strategy reentered quickly, but the damage had length, instead of using just a single-EMA system. The 30-day minimum
been done. EMAs work best when the decline is a slow holding period is included in the strategy rules. The results for the dual EMA
strategy are very similar to results from using a single EMA.
rollover. The decline in March 2020 was very fast, and
even short-duration EMA strategies can be locked into a
trade for 30 days. Applying the “failsafe” stop
But there is good news! These rapid declines occur Determining the parameters for the fail-safe stop becomes
infrequently. And most HY fund managers are willing somewhat complicated because there is a tradeoff between
to forgive the rare short-duration trade, or put you in a return, MDD, and how often the stop is applied. We now
limited-duration penalty box if you break their minimum have four parameters to optimize—the two parameters in
hold rule. So, can we fix our strategy with a “failsafe” the original S/L dual EMA crossover, and the short and
stop that triggers very infrequently? The simplest type long parameters for the S/L EMA crossover failsafe stop.
of stop would be a percentage trailing stop, but then the Also, the way the fund managers treat short-term trades
question is: “When to reenter the trade?” The approach (STT) can be based on a rolling basis. For example, if you
we took was to use a second S/L EMA on the basic S/L have a second SST within, say, 90 days, more than three
strategy equity curve. We could have used a single EMA, per year, etc., it becomes more problematic.
but we chose to use a S/L EMA crossover stop on our For our strategy, we wanted to avoid more than a hand-
strategy equity curve for
flexibility. To be clear,
this stop isn’t required
to obey the 30-day
minimum holding rule,
that is, when it triggers,
the HY bond is sold
even if the fund is held
for less than 30 days.
The strategy continues
to use the original S/L
EMAs internally, and
requires the internal eq-
uity curve to go positive
INVESTORSFASTTRACK
with respect to the fail-

safe S/L stop to reenter
HY bonds. Later, we
will show a graphical FIGURE 4: EXAMPLE OF LOCKED-IN TRADE. The strategy purchased the bond fund index (MLB-) on February 5,
example to clarify. 2020 and was locked into the trade with a 30-day hold (due to limits on trade frequency), selling at the index’s absolute
minimum on March 23. Clearly, when sudden market drops occur, the 30-day hold rule can lead to unfortunate timing.
# STT
Annual Trades Avg Short (fast) Long (slow) Short EMA Long EMA
Case # Description MDD, % in rolling
Return, % Avg/Year STT/Year EMA EMA (Stop) (Stop)
90 days
0 Buy & hold 6.7 35.4 N/A N/A N/A N/A N/A N/A N/A
1 No trade restrictions 12.5 4.5 20.2 212 7.5 1 12.5 N/A N/A
2 0 STT in 90-day window 10.1 14.7 6.5 0 0 8 11.5 N/A N/A
3 1 STT in 90-day window 10.8 3.9 5.7 1 0.4 1.3 28.8 4 99
4 2 STT in 90-day window 11.0 5.8 6.3 2 0.5 1.3 21.1 23 56
5 3 STT in 90-day window 11.1 5.7 6.4 3 0.5 1.3 21.3 27 48
6 0.1 Avg STT/year 10.1 7.0 6.0 0 0.1 1.0 27.5 36 227
7 0.2 Avg STT/year 10.6 4.4 5.4 0 0.2 1.6 28.8 6 107
8 3 STT in 90-day window* 10.1 8.2 5.4 3 0.7 1.6 20.0 25 56
9 CE funds—no restrictions 14.4 12.7 14.2 N/A N/A 1.0 36.3 4 238
FIGURE 5: RESULTS FROM GENETIC ALGORITHM OPTIMIZATION. Results include both in-sample and out-of-sample results with a short-term trade
(STT) defined as holding a fund less than 30 calendar days—*except case 8, which used 60 days as a minimum holding period.
ful of STTs within any rolling 90-day window over the mization with regard to the order of the date ranges for
entire 30+ years of the strategy and keep the total number in-sample (IS) and out-of-sample (OS) date ranges—that
of STTs to a small number. is, OS before or after the IS date range? We decided to
Because of the number of parameters and trading limits use the recent data for IS because there have been several
on STTs, we will use a genetic algorithm (GA) to determine market disruptions in recent years, and we acknowledge
robust optimum parameters—that is, accept parameters that recent markets are moving faster as HY bonds have in-
are somewhat insensitive to variation of the parameters. creased in popularity.
This is where we now explain why we used non-integer The IS date range chosen was 12/31/1991–12/31/2020,
values for our S/L EMA parameters. and the OS date range was 11/28/1988–12/31/1991. We
For a more detailed description of how we use GA optimi- retained 2021/2022 data to examine the strategy completely
zation, see our December 2020 S&C article, “Hedging The outside the optimization process.
S&P 500 Index Using Low-Correlation ETFs.” Within the Overoptimization, or data mining, is a major issue, and
GA there is a robustness check on parameters. Parameters one advantage of GA optimization is that as the optimiza-
are varied by a percentage of +/− 10%. If the strategy per- tion progresses, we can monitor OS results; and when the
formance is significantly impacted by this variation, then OS results begin to decline we can stop the optimization
this strategy doesn’t survive the optimization process. By and review the most favorable strategies found to that point.
way of example: If we used a strategy of, say, 5 days for the All optimizations were made to maximize annual return.
short/fast EMA and a value of 25 for the long/slow EMA, We could have included a secondary goal to minimize
we examine the parameters around the 5/25 parameters, MDD, but the MDDs from the optimization were quite
that is, 4.5/22.5 (S/L) days and 5.5/27.5 (S/L) days. If we low without including MDD as a secondary goal. Figure 5
were to round to the nearest integer, the variation could contains the results of GA optimizations that used various
be much larger than our 10% value or not change at all for assumptions and constraints.
smaller numbers. Having said this, we did use integers for Case 0 is simply B&H. Case 1 optimized parameters
the failsafe stop S/L EMA parameters because we were for maximum return without any trading restrictions.
dealing with larger numbers, and larger rounding to the Case 2 put a restriction of no STT at any time during the
nearest integer wasn’t a significant issue. entire optimization, i.e., no failsafe stop. Cases 3–5 put
As we have noted in our previous S&C article, strategy restrictions on the total number of STTs, i.e., 1, 2, or 3,
developers are not of one accord when it comes to opti- occurring within any rolling 90-day window. For example,
case 3 only allowed a single STT within a rolling 90-day
window. Remember, this spans the entire 33 years of the
We want this strategy to trade strategy evaluation.
well against a large basket of Cases 6 & 7 took a different approach and put a restriction
on the average number of STTs each year. For example,
open-end HY bond funds.
if the goal is 0.1 per year then a STT would occur once a
decade on average.
Learn
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Case 8 changed the
minimum holding pe-
riod from 30 to 60 days,
and allowed a total of 3
STTs during the roll-
ing 90-day window. It
is equivalent to case 5
but using 60 days as the
minimum holding pe-
riod rather than 30 days.
This case was intended
to evaluate the impact
on performance if a fund
management requires 60
days rather than 30 days.
There was little impact
on return, but a modest
increase in MDD. FIGURE 6: RECENT FIVE YEARS OF BOND INDEX (7/14/2017–7/14/2022) AND CASE 5 WITH & WITHOUT FAIL-
Observation: You may SAFE STOP. The results include post-optimization performance. Note that the failsafe stop helped the strategy to avoid
much of the 2020 and 2022 declines.
ask why the more restric-
tive case 3 has a lower
MDD than cases 4 & 5. That is simply the nature of the of these trades to have a higher confidence in the se-
randomness in market declines. In the future, we would lected failsafe parameters, but that would also drive up
expect case 3 to have larger drawdowns than cases that our STTs. Figure 6 shows the MLB- index and case 5
allow for more STTs. with and without the fail-safe stop for the last five years
Allowing just a single case (case 3) of a STT in a 90- (7/14/2017–7/14/2022). Note: This includes results post-
day window made a significant difference on MDD (3.9% optimization, i.e., post 12/31/2020). The failsafe stop
versus 14.7%). slightly hurt performance heading into 2020, but the stop
Digging deeper into case 5: It had 74% winning trades paid dividends by keeping the strategy out of trouble in
and 71.5% time invested in HY bonds. The number of trades the 2020 Covid decline, and during the 2022 inflation/
numbers in the 100s, which is statistically significant, but a bond decline. Without the failsafe stop, the strategy kept
system develop- trying to go long during the declines.
Ticker Ann% MDD% Cor Beta
er would likely
FAHDX 12.80 14.80 0.77 1.16
ask how often Using the strategy signal on actual
FAGIX 11.90 17.70 0.77 1.08
does the failsafe high-yield funds
FHYTX 11.00 9.10 0.80 0.95
stop trigger? The Recall that our signal strategy was based on trading the
FHIIX 10.80 6.70 0.88 0.83
answer is only 17 MLB- Index. How well does the signal strategy do with
times. We would actual HY bond funds? Of the 260+ HY bond funds in the
FHAIX 10.80 9.50 0.77 0.92
normally like FastTrack database, only 17, excluding different classes
PRHYX 10.70 7.20 0.78 0.77
to have around of the same fund, have existed since 12/31/1988. Figure 7
PHYIX 10.70 6.70 0.89 0.81
twice as many shows statistics on trading these 17 funds using the signal
AMHYX 10.60 13.20 0.77 0.85
from case 5. Also included is
the correlation and beta of
AHITX 10.50 13.20 0.79 0.85
FIGURE 7: SAMPLE RESULTS USING BOND FUND
each fund with respect to the
MHITX 10.20 6.20 0.80 0.87
VERSUS BOND INDEX. How well does the strategy do with
high-yield bond funds rather than the bond index? For this MLB- index.
INEAX 10.10 12.60 0.73 0.82
NEFHX 10.00 15.90 0.79 0.94
test, trading signals from the case 5 strategy were used with Clearly, there are differenc-
LBHYX 10.00 11.00 0.82 0.84 17 high-yield bond funds (12/31/1988–7/12/2022). Result- es in the effectiveness of the
KHYAX 9.90 7.50 0.87 0.88 ing statistics (annual return, daily maximum drawdown) trading signal for the different
are shown here. Also shown are the correlation and beta
PHCHX 9.30 7.60 0.80 0.80
of each fund with respect to the bond fund index (MLB-). funds. This isn’t too surprising
VWEHX 9.20 5.60 0.77 0.76
Although results varied due to differences in the bond funds, because funds have different
IHIYX 8.90 8.40 0.80 0.81 the signal was very effective with most funds. risk criteria and can allow
holding bonds with dif-
ferent ratings and mix
of ratings. A general
observation is that the
higher-beta funds tend
to have larger MDDs
and slightly better re-
turns. The signal was
very effective with some
funds. FHIIX (Feder-
ated Hermes High In-
come Bond Fund) did
particularly well with a
return of 10.8% annual
return/6.7% MDD com-
pared to 6.9%/32.6%
B&H for FHIIX without
the signal. Graphically, FIGURE 8: RESULTS OF USING CASE 5 STRATEGY TO TRADE FXIIX. The signal was very effective with the Federated
Figure 8 shows FHIIX Hermes High Income Bond Fund (FHIIX), one of the funds from Figure 7. This table shows the annual return (logarithmic
scale) trading FHIIX with and without the signal, that is, trading FHIIX with the case 5 signal versus B&H.
with and without the
trading signal.
and the volatil- Using Case 5 Signal Using Case 9 Signal
HY bond ETFs and closed-end funds ity. Investors Ticker Ann% MDD% Ann% MDD%
As noted earlier, ETFs and CE funds don’t have trading also need to HYB 12.0 18.5 12.4 32.1
restrictions, and we looked at using the strategy on HY be aware of po- CIF 11.2 30.8 11.5 30.8
bond ETFs and CE funds. We looked at trading the largest tential liquidity HIX 10.6 21.9 8.1 28.8
HY bond ETF (HYG) using the case 5 signal. From to issues with CE DHY 10.2 18.8 11.0 32.8
4/11/2007 (ETF inception) to 7/12/2022, B&H of HYG has funds. We iden-
VLT 10.0 19.3 10.8 31.2
a 4.25% annual return with a 34.3% MDD. Meanwhile, tified 19 CE
EAD 9.8 18.9 10.2 37.5
using the case 5 signal, the performance was a 4.6% return HY bond funds
AWF 9.7 16.9 9.5 34.3
with a 13.9% MDD—certainly, a significant improvement in the Inves-
HYT 9.5 18.6 9.5 27.8
in MDD. However, over the same time period, MLB- re- tors FastTrack
turned 8.9% with a 3.5% MDD using the case 5 signal. database. On
NHS 9.5 22.0 9.2 32.6
This may be unfair comparison because we don’t care about average, these
CIK 9.4 17.3 10.1 32.5
trading restrictions on HYG; however, when we optimize funds have ap-

BLW 8.4 16.5 7.8 22.4
HYG for maximum return without any restrictions, we get proximately a HIO 7.0 15.4 7.0 24.8
5.02% annual return and a 10.5% MDD—not a significant 0.5 correlation FIGURE 9: RESULTS OF TRADING LEVERAGED
CLOSED-END HIGH-YIELD BOND FUNDS. Per-
improvement over our restricted strategy. with MLB- and formance is shown for individual closed-end (CE)
Leveraged CE funds do provide better returns, with a a beta of ap- funds using the case 5 and case 9 trading signals,
corresponding increase in MDD. In addition to the leverage, proximately 2. 12/31/2003–7/12/2022. Often, leveraged CE funds
CE fund trading prices can have premiums and discounts on Some of these provide better returns, with a corresponding increase
the net asset value, which also increases both potential gain funds have lim- in drawdown.
ited historical
data, but twelve of the funds had data from 2004 forward.
Using the case 5 signal, we get the results in Figure 9.
We often think that EMAs need For comparison, MLB- and the case 5 signal had a cor-
to use “integer” number of days. responding return/MDD of 9.0%/-5.9% over the same
However, you can actually use date range.
fractional days. Encouraged by CE funds results in Figure 8 using the
case 5 signal, we took one additional step and optimized a
signal for CE funds that became case 9 (Figure 5). Rather
than using the MLB- index, we used an average of our 19
CE funds to create a synthetic index to better represent
the CE funds. There were no restrictions on trades, that The improvement in returns
is, no minimum holding periods; however, we did include trading HY bonds, compared to
a 0.05% trading slippage fee. The GA optimization pro- B&H, using EMAs is quite good,
cess used the same IS and OS date ranges used for the
open-end funds.
but perhaps more important is
The annual return for case 9 using the synthetic index the significant reduction in MDD.
of the CE funds (Figure 8) looks very encouraging with
a 14.4% return and a respectable 12.7% MDD; however,
that is where the good news ended. When we applied the were disappointed with using the methodology on HY
case 8 signal to individual CE fund (last two columns of ETFs, but the CE funds show promise for those with a
Figure 9), the annual return was not generally improved higher risk tolerance. Much more work could be done
and the MDDs were significantly worse compared with developing a CE fund strategy.
using the case 5 signal. We should mention that the B&H
MDD for the 19 CE funds were mostly greater than 50% Brothers Ken Huck and Nelson Huck are the founders of
with some as high as 70% so there was a significant de- Edge Ware, Inc. (www.edge-ware.com). Since 1995 they
crease in the strategy MDD versus B&H. Why did we get have developed a number of programs to help investors
such poor results? A couple reasons: Optimization was on create trading systems and have consulted with money
the average of the funds; and that average curve is much managers. Their FastBreak Pro program was one of the
smoother than the individual funds. Also notice that the first commercially available programs to use a genetic
long failsafe stop parameters are much more forgiving algorithm for optimizing trading strategies. They can be
than the parameters for the other cases. This tended to contacted at email2ew@edge-ware.com
prevent a close stop on the equity curve.
Further reading
Concluding comments and areas Huck, Ken, and Nelson Huck [2020]. “Hedging The S&P
for improvement 500 Index Using Low-Correlation ETFs,” Technical
The improvement in returns trading HY bonds, com- Analysis of Stocks & Commodities, Volume 38:
pared to B&H, using EMAs is quite good, but perhaps December.
more important is the significant reduction in MDD. The Huck, Ken [2020]. “Creating Synthetic Historical Data,”
methodology and strategy described in this article may Technical Analysis of Stocks & Commodities, Vol-
serve as a starting point for strategy developers. Readers ume 38: March.
may notice (Figure 5) that a good place to start for the Kaufman, Perry J. [2005]. New Trading Systems And
short EMA parameter is 1–2 days and 20–30 days for the Methods, 4th edition, John Wiley & Sons.
long EMA. Choosing failsafe stop parameters is a little Pardo, Robert [2005]. Design, Testing, And Optimization
more problematic because they are a much wider range Of Trading Systems, 4th edition, John Wiley & Sons.
of parameters, but there does appear to be a sweet spot [2008]. The Evaluation And Optimization Of Trad-
around the 25/50-day S/L parameters. ing Strategies, 2nd edition, John Wiley & Sons.
There are several areas for improvement. One could ‡Investors FastTrack (https://fasttrack.net)
argue that we should have ignored older data, and re- ‡See Editorial Resource Index
stricted our analysis to more recent HY bond data—this
is worth consideration. And although we restricted STTs,
there is considerable trading in an average year. One area
to examine is to look at the impact on performance if the
number of trades is reduced. Perhaps the greatest improve-
ment would be to use the actual funds that will be traded
to create an index, rather than a generic HY bond index.
Also, we assumed a minimum hold period of 30 days for
most of our analysis, but increasing the minimum holding
to 60 days didn’t have a significant impact on results. That
may not be the case for even longer holding periods. We
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
ELIMINATING STRESS? backtest you ran. But you are discour- a significant role in algo trading. If
Long-time discretionary chart trader aged by this recent performance, and you can follow the rules 100% and
here, tired of the stress inherent with you decide to turn the algo off for a let the algo do its thing without
this type of trading. I am thinking of week, since it might be broken. Of interference, then emotions can be
algo trading instead. If the computer course, the next signal is a winner, kept in check.
makes buy/sell decisions for me, but you missed it. To overcome this Good algo trading, therefore, starts
won’t my stress level and emotions missed trade, you double size for the with having confidence in what your
be eliminated? next trade. No surprise, that trade algos are doing. Having properly
I hear this a lot: “Oh, I will just algo loses. After all this, you blame the conducted backtests is a key part of
trade, there are few or no emotions algo and have no confidence in it that. After that, you must have the
involved in that.” any longer. discipline to follow the algo without
What a crock. fail.
Realize that people who espouse The neat thing about this is once
the “no emotions in algo trading”
Whatever style of you get in the habit of being disci-
theory fall into two camps: either trading you favor, plined with your algos and you start
they do not trade at all, or they only confidence is a huge to see good results, your confidence
trade on simulators. Keep that in part of your success. begins to soar. You now believe in
mind as you ponder following their how you are trading, which of course
“wisdom.” What just happened? First, you makes you more disciplined and in-
When real money is on the line, initially lost confidence in your algo duces more confidence. It is a spiral
emotions will be involved. Guar- for no legitimate reason—since the upwards to trading success.
anteed. backtest showed three losses in a If you go into algo trading realizing
That being said, it is possible to row was possible. Then, you lacked that emotions can play a significant
reduce or temper the emotions in algo discipline by trading against the algo. role, and understand that confidence
trading. It really comes down to two And in the end, you are no longer and discipline are the tools to keep
things: confidence and discipline. confident nor disciplined in trading emotions in check, you will find
Whatever style of trading you favor, this algo. Your emotions are likely your trading endeavors a lot less
confidence is a huge part of your a wreck! stressful.
success. Confidence is the ability to Another example: Say there is a
weather the storm, to know that if you Fed announcement this week, or an
just keep doing proven tasks (such as inflation report release, or some kind
following your algo) good outcomes of news event. You decide to manu- YOUR ONLINE
will happen. ally overrule your strategy and turn RESOURCE FOR
Discipline is the proper execution off signals for this week. You end TECHNICAL
of that algo. Discipline is the key to up missing out on good trades. You
ANALYSIS
minimizing the impact of emotions. kick yourself for overriding your
Why is discipline so important? algo. Again, your emotions are high
One example: Say your current live with this algo.
algo has lost three trades in a row, These two simple examples make
which happened many times in the it clear that emotions can and do play
Filtering Trades To Improve Trade Selection
The Outside Bar: A Rare

And Powerful Filter
Some price patterns can be used to filter trades. Find In this article, I’ll discuss a pattern called the outside
out the impact the “outside bar” can have on some bar. This pattern can be considered rare and powerful.
trend-following strategies and how useful this can be. I’ll show why that is so, and I’ll show its impact on some
This article includes code to discover outside bar fre- trend-following patterns.
quency in various markets, and sample code to trade
those occurrences. What is an outside bar?
A bar is called an “outside bar” (OB) if its high is above
by Andrea Unger the previous bar’s high and its low is below the previous
In
bar’s low.
the markets, trading decisions are made based It should be noted that in this article, I’ll always refer
on the configuration of market prices. This is to an outside bar with a daily timeframe. Figure 1 helps
what makes up price action. It’s commonly to explain. On the right, you can see a daily price bar for
said that prices incorporate all available in- yesterday, with a range that exceeds the highs and lows
formation into their movements and that the from the day before yesterday, represented
trader can start from the prices themselves by the bar on the left.
to decide how to trade. This pattern indicates an increase in
I’ve always used price patterns in my systems, but volatility and doesn’t necessarily indicate
VIDEOFLOW/SHUTTERSTOCK
never as a starting point. At the Unger Academy, we

FIGURE 1: THE OUTSIDE BAR (DAILY TIMEFRAME). In
teach when and how to use patterns like these, which act this diagram, on the right is a daily price bar for yesterday
like filters applied to basic systems and set to a specific with a range that exceeds the highs and lows from the day
trading approach. before yesterday, represented by the bar on the left.
PRICE PATTERNS
a market direction. In other words, it shows us that dur- countsession countOB

ing yesterday’s session, buyers and sellers took turns
moving the book until they reached both relevant highs
and lows.
Is it a common price pattern?

If we understood how the construction of this pattern
FIGURE 2: HOW RARE IS THE OUTSIDE BAR PRICE PATTERN? We
takes place, we could guess that an OB occurs very can use a simple program to count all the OBs produced by a market and
rarely. But how rarely? relate them to the total number of sessions. This table shows the percent-
To answer that question, we can use some simple code age of occurrences in different markets from 2010 to October 2022 as
(in PowerLanguage for MultiCharts) that calculates the calculated by the program.
percentage of occurrences in different markets from
2010 to the present as I write this in the third quarter input:
of 2022: mystartbar(2), myendbar(35),
length(90),
var: countOB(0), countsession(0), ID(1),
dateInDateTimeFormat(0), datereadable(""); mystop(0);
dateInDateTimeFormat = ELDateToDateTime(date); var:
datereadable = FormatDate("dd-MM-yyyy", dateInDate- mybar(0),
TimeFormat); mylonglevel(1000), myshortlevel(0),
if (high[1]>high[2] and low[1]<low[2]) then begin // valid for mypattern(true);
daily bars if sessionlastbar then mybar = 0;
countOB = countOB+1; mypattern = (highs(1)>highs(2) and lows(1)<lows(2));
end; mybar = mybar + 1;
sessioncount=sessioncount+1; mylonglevel = HighestFC(High, length);
print(File("C:\test.txt"),datereadable," ",countOB," ",ses- myshortlevel = LowestFC(Low, length);
sioncount); if mybar >= mystartbar and mybar <= myendbar and
mypattern then begin
We’ll count all the OBs produced by a market and relate buy next bar at mylonglevel stop;
them to the total number of sessions. (See Figure 2.) sellshort next bar at myshortlevel stop;
If we use this pattern as a traffic light to allow our end;
market entries (that is, we’re only allowed to trade if an setstopcontract;
OB was formed yesterday), it’s expected that the number if mystop > 0 then setstoploss(mystop);
of trades in our system will be significantly reduced by if ID = 1 then setexitonclose;
up to 90%.
The code shown above contains a mirror trigger for the
A simple system for trading the outside long and short sides, calculated on a 90-bar Donchian
bar that can be applied to different channel (length equals about two sessions). The number
markets of bars of the channel is equivalent to the estimated
Let’s analyze the impact of this pattern on instruments number of bars in a given trade.
with different characteristics. We’ll create a basket of
instruments containing CME futures, such as stock
indexes, bonds, metals, and energy commodities, and
plot each instrument using a 30-minute timeframe (so
a futures contract that trades 23 hours per day is plot-
A bar is called an “outside
ted with 46 bars per session). Specifically, we’ll use the bar” (OB) if its high is
following futures: @CL, @RB, @NG, @HO, @GC, @ above the previous bar’s
HG, @ ES, @US. high and its low is below
We’ll now need some code with which we can perform the previous bar’s low.
the first test on all underlying assets:

We use a trading time window, meaning we only
allow entries when we are within a time window that
starts one hour after the session opens and ends about
five hours before the session closes to give the trades
time to develop.
In our code, we used a Boolean-type variable called
“mypattern.” The Boolean variable is true if an OB oc-
curred in yesterday’s session or otherwise false.
if mybar >= mystartbar and mybar <= myendbar and

mypattern then begin
buy next bar at mylonglevel stop;
sellshort next bar at myshortlevel stop;
end;
From the above part of the code, we see how our system
takes a market position through stop orders, both long
and short, placed on the upper and lower levels of the
channel, respectively, but only if:
a. we are inside the trading time window

b. yesterday’s session was an outside bar.
Note that we don’t apply a stop-loss because we want

to introduce as few conditions as possible to read the FIGURE 3: SYSTEM TRADES WITH AND WITHOUT THE FILTER. We can
results better at this stage of the study. However, we’ll look at how a system’s metrics change with and without the use of the outside
bar (OB) price pattern used to filter the trades taken by the system.
close the position at the end of the session by applying
a time stop.
the number of trades will be significantly reduced,
The results: How do a system’s metrics and, consequently, the net profit will be reduced as
change with or without the use of the well (what we had expected). This is not a prob-
OB filter? lem, though, since now our goal isn’t to identify a
Thanks to our code, we can insert the filter ”mypattern” strategy but to understand how the presence of an
or the filter “mypattern=false” to see how the results of OB affects the results.
the original system change with and without filters (see • By setting mypattern to false, we are making sure
the three-part table in Figure 3). we do not trade after on OB occurs.
For the first case, we’ll use the code already shown in • Comparing the metrics of systems B and C with those
the previous section. For the second case, we’ll replace of the original system A, we can see how system
the line highlighted in yellow with the following line: B leads to selecting trades with a higher average
trade (AT) and significantly reduces the maximum
if mybar >= mystartbar and mybar <= myendbar and
mypattern = false then begin
The metrics shown in the tables in Figure 3 contain data

from 01/01/2010 to the present. If we understood how the
From the analysis of the results provided by our system, construction of this pattern
we obtained information, some of which we expected takes place, we could guess
and some of which revealed something new: that an OB occurs very
rarely. But how rarely?
• If we apply the “mypattern” filter—that is, we as-
sume that there was an OB on the previous day—
ABLETREND Trusted Reliable Signals
drawdown (max DD) in almost
all the analyzed instruments,
for Volatile Markets Since 1994
especially in dynamic markets
such as the energy futures.
• From the results of system B, Sweet Spot:
the @HG is also positively Entry Close to the dots
Helps to Define & Limit Risk
affected by the use of the OB with Potential for Big Trends
filter, while in the case of the
@GC, the system significantly
worsens the AT.
• In the case of the @ES, system
B brings tangible benefits, al-
though we know that the US
stock markets respond much Re-testing Key Support
better to mean-reverting ap- Early Buy Signal in March 2022 Revealed by AbleTrend Dots
proaches with countertrend Indicated by Buy Bar & Blue Dot
entries.
Let’s go further: Are

there other conditions
we can analyze?
So far, we’ve seen how the introduc- Fresh Sweet Spot Signals
tion of OB leads to stringent filtering Updates to Signals in Progress
of trades and improved AT of the basic *Access the New Resource from the Link Below
system in some markets (especially
in energy futures). Traders Rave Over AbleTrend
We wonder now whether any condi-
tions could affect the results in any
way. We’ll therefore ask the following
ABLETREND 7.0 COLLECTED BY
questions, focusing on the energy SINCE 1994
futures sector:
a. Yesterday, when the OB was

being developed, did the value
of the body-to-range ratio have
an impact on the systems ana-
lyzed?
b. Do the previous results change
regardless of whether yester-
day’s close was at the top or bot-
tom of OB? And if so, how?
Tests on historical data can provide

the answer to these questions. We will TEST DRIVE THE LATEST SIGNALS
change the original code periodically,
introducing or removing a single ad-
ditional condition and observing if
and how the results vary.
THESE RESULTS ARE BASED ON SIMULATED OR HYPOTHETICAL PERFORMANCE RESULTS THAT HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE THE RESULTS
SHOWN IN AN ACTUAL PERFORMANCE RECORD, THESE RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, BECAUSE THESE TRADES HAVE NOT ACTUAL-
For case (a), we’ll introduce the new

LY BEEN EXECUTED, THESE RESULTS MAY HAVE UNDER-OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF
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
variable “mybodyrange” and change SHOWN. THE TESTIMONIAL MAY NOT BE REPRESENTATIVE OF THE EXPERIENCE OF OTHER CLIENTS AND THE TESTIMONIAL IS NO GUARANTEE OF FUTURE
PERFORMANCE OR SUCCESS. TECHNICAL ANALYSIS OF STOCKS & COMMODITIES LOGO AND AWARD ARE TRADEMARKS OF TECHNICAL ANALYSIS, INC.
the entry condition as follows:
var: mybodyrange(true);
mybodyrange = absvalue(opens(1)-closes(1)) >
0.5*(highs(1)-lows(1));
if mybodyrange and mybar >= mystartbar and mybar <=
myendbar and mypattern then begin
buy next bar at mylonglevel stop; FIGURE 4: SYSTEM TRADES WITH THE OB FILTER. We can look at
sellshort next bar at myshortlevel stop; how a system’s metrics change with the use of the OB price pattern as a
filter. This shows results from the original system with the filter applied.
end;
The results show that the introduction of this new condition and the pres-
ence of an OB leads to an increase in average trade and a decrease in
The results are shown in the table in Figure 4. These drawdown in almost all cases.
results show that the introduction of this new condition
and the presence of an OB leads to an increase in AT
and a decrease in max DD in almost all cases.
To examine how the results change in case (b), we’ll
introduce two new variables, “mycloseupyest” and
“myclosedownyest,” and change the entry condition as
FIGURE 5: TESTING DIFFERENT CONDITIONS. We can change the
follows: original code from time to time to introduce or remove a single additional
condition and observe if and how the results vary. Here, two new variables
var: mycloseupyest(true), myclosedownyest(true); were introduced in the code to change the entry condition. In this case,
mycloseupyest = ((highs(1)-closes(1))<0.20*(highs(1)- the results show that the position of the close, associated with the pres-
lows(1))); ence of an outside bar, doesn’t have a clear and significant impact on the
trade results.
myclosedownyest = ((closes(1)-lows(1))<0.20*(highs(1)-
lows(1)));
if mybar >= mystartbar and mybar <= myendbar and surrounding values that provide stable results—but we’ll
mypattern then begin leave that task to the reader.
if mycloseupyest, then buy next bar at mylonglevel We can conclude, however, that of the cases analyzed
stop; in this section, the first case certainly brought the most
if myclosedownyest then sellshort next bar at myshort- benefit to our starting system.
level stop;
end; Final thoughts and further uses of OB
We’ve shown that in the case of the major energy futures,
The results are shown in the table in Figure 5. The allowing market entry only after the presence of an OB
results show that the position of the close, associated had a significant impact on system metrics by increasing
with the presence of an OB, doesn’t have a clear and AT and significantly reducing max DD.
significant impact on the trade results. Metrics improved further when OB had a body-to-
In all the situations studied in this section, we used range factor of at least 50%, while the closing level of
rules containing a specific value. In the first case, we OB didn’t provide clear benefits.
set the value 0.5 as a watershed to identify the so-called On the other hand, we observed that allowing the sys-
dailyfactor (mybodyrange); in the second case we use tem to enter only in the absence of an OB didn’t produce
the value of 0.2 as a limit to indicate whether the close significant improvements.
of the previous day was in the high (over 80%) or low It would be worthwhile to continue the study and test
(under 20%) part of the daily range. These parameters different entry strategies on a broader basket of instru-
could be further explored to find better solutions with ments to try to benefit from such a rare and powerful
filter.
Andrea Unger is a full-time professional trader, president

This pattern indicates an increase of The Unger Academy, and author of The Unger Method.
in volatility and doesn’t necessarily He is a four-time World Trading Champion (2008, 2009,
indicate a market direction. 2010, and 2012), an honorary member of SIAT (Italian
Continued on page 43
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.
WHY THE 50- AND 20-DAY MOVING take your money and then disappear. the moving averages are for market
AVERAGES ARE STILL EFFECTIVE I am talking about real and hopefully analysis, both on equity indexes and
TODAY qualified professionals in the business on individual stocks.
In the field of technical analysis, who deliver regular information and Moving averages are a tool that
there are methods and practices that opinions. I am looking at the large have been in use for a very long
work without any reason. And since following some of them can gain time. They are not new or innovative.
technical analysis is an empirical ap- these days on social media and on If you were a sophisticated trader
proach, we are forced to accept and video platforms on the internet. Truly, looking for something impressively
acknowledge that a method works once you start following them, you and overly complicated, you would
well without necessarily knowing can become quickly addicted to their surely look down your nose at popular
why it does. opinions. moving averages, considering them
I have always wondered why this trivialities. But the truth is, they are
happens in technical analysis. One Since the 200-day not trivialities.
reason could be that once a method moving average has In Lawrence Connors’ well-regard-
is widely accepted by all market been around for almost ed books on market analysis—and
participants, then it becomes self- this is an author who is known for
fulfilling.
a century, we need to quantitative trading techniques—his
If you walked up to a business, say, look back at the times analysis often relies on a 200-day
a bakery, and asked what is the best when computers did moving average. He found them to
bakery in town, they will tell you that not exist. be highly effective on stocks and
they are. This is obvious. stock indexes. And whenever Connors
I could liken myself to being a I am thinking of one person in par- would speak about the markets, he
“baker” in the field of technical ticular I enjoy watching on YouTube would show plenty of statistics to back
analysis. However, I will plainly tell (whom I won’t name here, as it’s not up what he was saying, in case you had
you that there are other bakers in the the point of my discussion). I consider any doubts that there is any serious
field who make bread at least as good his analysis brilliant. Yet his analysis evidence to the methodology.
as I do or even better. is based mostly on moving averages, Getting back to the whys and where-
My willingness to be fair in this and in particular, the 50-day and 200- fores: One of the reasons the 50- and
open assessment of myself may be day moving averages. He is a veteran 200-day moving averages are effec-
unusual in business. In business, the trader with many years of experience, tive is that everybody watches them
goal is normally to convince the con- and having an experienced market and so everybody reacts to them. Not
sumer that your product or service is analyst share their analysis with other everyone reacts to them in the same
the best around. users is valuable for many of us. way—some may buy and some may
In the technical analysis arena, In his approach, he treats the two sell, but in any case, there is reaction
there are some who make themselves moving averages almost like variable in the markets all at the same moment.
highly visible and they become public support and resistance levels, where it It is why we can watch those averages
figures in the field. I am not talking is presumed that price reactions will and reasonably expect something
about the hucksters who make a big tend to happen. And day by day in
commotion over themselves only to his videos, he shows how effective Continued on page 49
Focus On The Trend
Do Small Price Changes Matter

Or Are They Just Noise?
Can trend trading be improved by filtering out small plication of this idea. It uses price changes to create a
price moves to emphasize the trend? Here are two test trendline based on volume. The rules are simple:
cases to help find out.
If today’s S&P price closes higher, add the total volume
by Perry J. Kaufman of today’s trading to OBV, the accumulated volume.
A
If the S&P closes lower, subtract today’s total volume
re trends more accurate if you ignore small from OBV.
changes in price?
Does it really matter if the S&P, or any stock, When I first studied the OBV concept, I wasn’t sure if
closes up or down by 1 tick, or even 1/10 of a the cumulative value of OBV had any relationship to the
percent? Are those days just noise, or are they trend of prices. After all, it only uses volume. Figure 1
important when we calculate a moving average system shows that the OBV (lower panel) applied to SPY is less
or other trend-trading systems? volatile than prices and has the same pattern.
To be fair, removing small daily changes might im- I tested the moving averages from 2000 through Oc-
prove one method and not another, so we’ll look at two tober 2022, long-only, for SPY and the OBV based on
very different trending techniques to see if there is any SPY. The best for both was the 80-day trend, shown in
consistency. Figure 1. Prices are in the top panel and the OBV in the
bottom panel. It is interesting to see that the trend of the
LISA-S/SHUTTERSTOCK
On-balance volume OBV looks smoother than the price trend.

We’ll start with Joseph Granville’s on-balance volume Code for the OBV in EasyLanguage can be found
(OBV), introduced in 1963. It seems like a natural ap- in the sidebar, “Code For Applying A Minimum-Price
TREND TRADING
TRADESTATION
FIGURE 1: ON-BALANCE VOLUME (OBV). Shown here is a price chart with an 80-day moving average of SPY (top) and the OBV with an 80-day
moving average (bottom). The OBV is less volatile than prices but has the same pattern.
FIGURE 2: OBV TREND TRADING SYSTEM WITH AND WITHOUT PRICE

FILTER. Compare the OBV trend system results with results when using
an optimized filter (that is, using a minimum move as a price filter). Given
one moving average (80-day lookback) and one price filter (80 basis points
FIGURE 3: USING ONE FILTER AND A RANGE OF MOVING AVERAGES.
minimum move), we see that the results are much better using the filter.
Is the result from Figure 2 robust? To find out, we can look at how other
filters affect the 80-day average. Here, an 80 bp filter is applied to a range
of moving averages on the OBV.
Filter To An On-Balance Volume Trading System, In
EasyLanguage.”
filter (80 basis points, or “bp”), we see that the results
Applying an optimized minimum price are much better using the filter (Figure 2). But is this just
filter
Still using the OBV, we want to know if a minimum
price filter improves results. We create a new series that
omits any price move under our threshold filter. I tested Are those days just noise, or are
filters from 0 to 1%, applied to the 80-day moving aver- they important when we calculate
age, with the best results at 80 bp (quite large). Note that a moving average system or other
you need to use a percentage filter so that it changes as trend-trading systems?
price levels change.
Given one moving average (80 days) and one price
FIGURE 6: TESTING A MINIMUM PRICE MOVE WITH THE 80-DAY
MOVING AVERAGE. Compared here is the 80-day moving average with
and without a 95 bp (basis point) minimum move as a price filter. Total
profits are much better although the risk is higher. However, the filter has
FIGURE 4: USING A RANGE OF PRICE FILTERS AND ONE MOVING reduced the number of trades to 3 versus 48 in the original moving aver-
AVERAGE. In contrast to Figure 3, here, a range of price filters is applied age system.
to an 80-day moving average of OBV.
age calculation periods (Figure 4). This does not cover

all combinations but increases our confidence that the
concept is valid.
In both Figures 3 and 4, the minimum-price filter
improves most cases, as seen by those returns that are
above the horizontal line. In general, using a minimum-
price filter seems to work.
Applying the minimum filter to

a standard moving average
Not many traders will opt for the OBV, so we’ll apply
FIGURE 5: MOVING AVERAGE SYSTEMS. This shows the results of the minimum filter to a standard moving average sys-
testing moving averages of various lookbacks on SPY from 2000 through tem. EasyLanguage code for that can be found in the
October 2022. The 80-day moving average shows the best result. sidebar, “Code For Applying A Minimum-Price Filter
To A Standard Moving Average Trading System, In
an optimized result or is the concept robust? EasyLanguage.”
To find out if this was an anomaly or if using a small As a benchmark, we tested SPY from 2000 through
filter improves most trends, we first look at how different October 2022, long-only, for a range of moving average
filters affect the 80-day moving average (Figure 3), then calculation periods. Results are shown in Figure 5, with
we look at how an 80 bp filter affects all moving aver- the 80-day showing the best result.
CODE FOR APPLYING A MINIMUM-PRICE FILTER TO AN ON-BALANCE VOLUME TRADING SYSTEM, IN EASYLANGUAGE
// PJK if MAOBV > MAOBV[1] and marketposition <> 1 then begin
// Copyright 2012-2021,2022 P J Kaufman. All rights re- if usefutures then
served. size = futuresinvestment / (AvgTrueRange(20)*big
pointvalue)
{ TSM OBV Trend else
Copyright 2011, 2022, P.J.Kaufman. All rights reserved. } size = stockinvestment/close;
buy size contracts next bar on open;
inputs: period(60), minpricechange(0), longonly(true), end
usefutures(false);
vars: stockinvestment(10000), futuresinvest- else if MAOBV < MAOBV[1] and marketposition <> -1
ment(25000), investment(0), then begin
MAOBV(0), size(0), OBVlocal(0); sell all contracts next bar on open;
if longonly = false then begin
if Close > Close[1] + minpricechange then if usefutures then
OBVlocal = OBVlocal[1] + Volume size = futuresinvestment / (AvgTrueRan
else if Close < Close[1] - minpricechange then ge(20)*bigpointvalue)
OBVlocal = OBVlocal[1] - Volume else
else size = stockinvestment/close;
OBVlocal = OBVlocal[1]; Sell short size contract this bar on close;
end;
MAOBV = average(OBVlocal,period); end;

CODE FOR APPLYING A MINIMUM-PRICE FILTER TO A STANDARD MOVING AVERAGE TRADING SYSTEM, IN EASYLANGUAGE
// PJK Moving average with minimum move then begin
// Copyright 2012-2021,2022 P J Kaufman. All rights re- sell all contracts next bar on open;
served. if longonly = false then
sell short size contracts next bar on open;
{ period = length of calculaton end;
crossoption = 0 using trendline, end;
= 1 use price crossing trendline // use price cross
longonly= "true" then only long positions if crossoption = 1 then begin
} if marketposition <> 1 and close >= AVG[np] then begin
// minPCmove in percent, e.g. 0.0001 (one basis point) buy to cover all contracts next bar on open;
buy size contracts next bar on open;
input: period(80), minPCmove(0), crossoption(0), end
longonly(false), else if marketposition <> -1 and close < AVG[np] then
usestocks(true),usefutures(false), printfiles(false); begin
input: futuresinvestment(25000),stockinvestment(10000); sell all contracts next bar on open;
vars: size(0), investment(0), ATRper(20), atrange(0), adate(" if longonly = false then
"), sell short size contracts next bar on open;
equity(0), PL(0), PLlong(0), PLshort(0), dailyreturn(0), end;
NAV(100), volper(20), returns(0), firstNAV(0), AROR(0), end;
peak(0), drawdown(0), maxdd(0), filename(" ");
vars: np(0), sum(0), ix(0); if lastbaronchart then
array: adjprices[10000](0), avg[10000](0); if marketposition > 0 then sell all contracts this bar on close
else if marketposition < 0 then buy to cover all con-
If Currentbar = 1 then begin tracts this bar on close;
if usestocks then investment = stockinvestment
else investment = futuresinvestment; equity = netprofit + openpositionprofit;
adjprices[1] = close; PL = equity - equity[1];
np = 1; dailyreturn = 0;
end; if investment <> 0 then dailyreturn = PL/investment;
NAV = NAV*(1 + dailyreturn);
// create moving average without prices with min moves peak = maxlist(peak,NAV);
// may remove a series of small moves totaling a bigger drawdown = NAV/peak - 1;
move! maxdd = minlist(maxdd,drawdown);
if currentbar <> 1 then begin if marketposition > 0 then
if close/close[1] -1 > minPCmove then begin PLlong = PLlong + PL
np = np + 1; else if marketposition < 0 then
adjprices[np] = close; PLshort = PLshort + PL;
end; if firstNAV = 0 and dailyreturn <> 0 then firstNAV = current-
end; bar;
// calculate moving average from array If printfiles then begin

sum = 0; adate = ELdatetostring(date);
if np > period then begin If Currentbar = 1 then begin
for ix = np-period+1 to np begin print(file("c:\tradestation\Trend_with_
sum = sum + adjprices[ix]; minmove_PL.csv"),"Date,Shares,DailyPL");
end; print(file("c:\tradestation\Trend_with_minmove_NAVs.
avg[np] = sum/period; csv"),"Date,NAVs");
end; print(file("c:\tradestation\Trend_with_minmove_Detail.
csv"),
if usefutures then begin "Date,Open,High,Low,Close,AdjP,MA,size,marketpositi
atrange = avgtruerange(ATRper); on,PLtoday,PLlong,",
if atrange = 0 then "PLshort,TotalPL,MaxDD,Return,NAV");
size = 0 end;
else print(file("c:\tradestation\Trend_with_minmove_
size = investment/(atrange*bigpointvalue); PL.csv"),adate, ",", currentcontracts:6:2, ",",
end; PL:8:4);
if usestocks then size = investment/close[1]; print(file("c:\tradestation\Trend_with_minmove_NAVs.
csv"),adate,",", NAV:10:3);
// set new signal print(file("c:\tradestation\Trend_with_minmove_Detail.
// use trendline csv"),adate, ",", open:8:4, ",",
if crossoption = 0 then begin high:8:4, ",", low:8:4, ",", close:8:4, ",", adjprices[np]:8:4, ",",
if marketposition <> 1 and AVG[np] > AVG[np-1] then begin AVG[np]:8:4, ",",
buy to cover all contracts next bar on open; currentcontracts:6:2, ",", marketposition:6:2, ",", PL:8:4, ",", PL-
buy size contracts next bar on open; long:8:4, ",", PLshort:8:4, ",",
end equity:8:4, ",", maxdd:8:4, ",", dailyreturn:6:5, ",", NAV:10:3);
else if marketposition <> -1 and AVG[np] < AVG[np-1] end;
We can then test a minimum price move with the 80- Figure 6. Total profits are much better although the risk
day moving average to see if it improves results. The is higher. The real problem is that there are only 3 trades
best was 95 bp, also quite large. The result is shown in compared to 48 in the original moving average. Most
small filter to ignore the small moves.
The filters will be 5, 10, and 25 basis
points. Figure 7 shows the results.
Of the four NAVs, the one without
any minimum price filter has the low-
est returns; the one with the largest
filter has the best returns. The statis-
tics in Figure 8 show that not only
do the returns improve as the filter
is larger, but the reward-to-risk ratio
improves. We were also looking for at
least as many trades as the case with
no filter, and that was satisfied.
Conclusion
FIGURE 7: APPLYING DIFFERENT-SIZED PRICE FILTERS TO IGNORE SMALL PRICE MOVES. These limited tests show that remov-
The trend system used here is a 50-day moving average on SPY. The filters applied in this test case
ing small price moves improves
are 5, 10, and 25 basis points. Of the four NAVs in the result, the one without any minimum price filter
has the lowest returns. The one with the largest price filter has the best returns. results for two trend systems—the
OBV system and a standard moving
average system. It does require creating a new price series
with small moves removed, but the improvement seems
to be worth the trouble, and you can use the code given
in this article’s sidebars to prepare your price series.
To answer the original question posed at the top: Small
price moves appear to be noise and do not help identify
FIGURE 8: STATISTICS FROM THE TEST CASE. The statistics are shown the direction of the trend.
here for the test in Figure 7. You can see that not only do the returns improve
as the filter becomes larger, but the reward-to-risk ratio also improves. In Perry J. Kaufman is a trader and financial engineer.
addition, the number of trades is now at least as many as in the case with
He is the author of many books on trading and market
no filter applied.
analysis, including the sixth edition (2020) of Trading
Systems and Methods (with the first edition published in
of us would find that unacceptable. We need to look at 1978 as a seminal book in the field of technical analy-
this differently. sis), as well as Kaufman Constructs Trading Systems
(2020), and the recently released book Learn To Trade
Applying the minimum threshold to (2022). For questions or comments, please go to www.
a faster moving average kaufmansignals.com.
By choosing a faster moving average and not a particu-
larly good one, we can see how a small filter threshold Further reading
works. It is more in line with our original thinking. From Kaufman, Perry J. [2022]. Learn To Trade, Amazon.
Figure 5 we can see that the 50-day calculation period is [2020]. Trading Systems and Methods, 6th Edi-
profitable, but not one of the best. We will then apply a tion, Wiley.
[2020]. Kaufman Constructs Trading Systems
(print and ebook editions), Amazon.
[2022]. “Trading A Moving Average System:
We want to know if a minimum Important Choices,” Technical Analysis of Stocks
price filter improves results, so & Commodities, Volume 40: January.
we create a new price series that ‡TradeStation
omits any price move under a ‡See Editorial Resource Index
threshold filter.

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
HOW CAN CRYPTO INVESTORS participants trust the system. Also, of this should sound familiar. How-
AVOID COUNTERPARTY RISK AND although life is not always fair, it ever, the futures industry is highly
PROTECT FUNDS? (PART 1) would be extremely unfortunate for regulated; the CFTC (Commodity
In light of the failure of FTX, a innocent savers to suffer at the hand Futures Trading Commission) sets
popular centralized cryptocurrency of a negligent bank or brokerage. Fu- rules and regulations enforced by the
exchange, speculators are reminded tures brokerage accounts are neither NFA (National Futures Association)
of the pitfalls that can come with de- FDIC nor SPIC insured, but there are via audits and investigations. Because
rivative trading beyond the apparent compliance rules in place intended to commodity accounts don’t have the
price risk. Stock and bond traders’ prevent clients from being negatively luxury of FDIC or SIPC insurance,
deposits and investment products are impacted by a brokerage firm’s failure the CFTC created a segregated fund
partially protected by programs such known as fund segregation policies. rule requiring brokerage firms to
as FDIC (Federal Deposit Insurance I’ll soon explain further. keep customer money in a separate
Corporation) and SIPC (Securities In- The FTX crypto brokerage col- bank account from firm money. With
vestor Protection Corporation). How- lapse brought back some personally such an arrangement, a brokerage
ever, derivative traders, particularly painful memories of the downfall of firm’s insolvency shouldn’t harm
forex and crypto, can be left holding two prominent futures brokers in the client funds. If all works as designed,
the bag should their brokerage firm upon bankruptcy of a brokerage
become insolvent. A robust economy firm, regulators simply transfer
The FDIC insurance program requires a propensity open positions and cash assets used
covers cash and cash equivalent for margin by customers to another
deposits (CDs and money market)
to save and invest; brokerage. This leaves the troubled
in FDIC-insured banks with a limit this is only possible if broker to deal with its financial mess
of $250,000 per person per bank. economic participants without causing harm to its clients.
SIPC insurance, on the other hand, trust the system. Except for the aforementioned PFG
protects against the loss of cash and and MFGlobal fiascos, this rule has
securities, such as stocks and bonds early 2010s (PFG and MF Global). successfully safeguarded commod-
held by a customer at a SIPC-member The FTX failure shared several ity traders’ funds from their broker’s
brokerage firm limited to $500,000. similarities, particularly with MF insolvency.
In either case, in the unlikely event Global, which allocated client funds Since the early 2010s, when these
that a brokerage or bank covered by to meet margin calls in sovereign breaches occurred, regulators have
these insurance programs becomes bond positions. Yet, in both sce- improved auditing techniques de-
financially troubled, these programs narios, the brokerage firms mingled signed to deter and prevent repeat
act as a backstop to limit the damage client funds with firm funds to cover occurrences. For example, the most
inflicted on savers and investors. The operational costs, contribute to risky significant improvement is the elec-
idea behind these insurance programs investments, meet firm margin calls, tronic auditing of banking informa-
is two-fold: A robust economy re- and lavish amenities for high-ranking tion instead of monitoring paper
quires a propensity to save and invest; employees.
this is only possible if economic If you’ve been following FTX, all Continued on page 40
Looking For Repeatable Processes As Algorithmic Trading Ideas
Improving Trading Systems

By Counting Events
It’s a simple concept that you may not have thought of. as possible. This is often done by combining price ac-
Find out how to implement it. tion signals with market breadth, macro factors, and
non-price-based signals such as economic data and
by David Bergstrom treasury spreads.
T
Many traders do not have easy access to non-price-
raders intently seek new trading signals or based data, since many retail platforms only provide
predictive patterns that can lead to improved OHLC (open-high-low-close) data. Signals based on
performance. However, one of the most over- simple moments in time rarely provide enough contextual
looked methods of improving indicators is to information to create robust trading systems.
simply count how often an event triggers in a Counting the number of events or signals can better
rolling window. communicate the current market environment, leading
A signal occurring once shares very little about the to more robust trading systems. Counting signals can
current market environment, but a signal occurring four improve price-action-only systems without the need to
or five times in the past five bars can give a pretty good incorporate non-price-based data.
idea as to the current market environment. The more
information we can pass to a trading system, the better Sample signal
it should fare. To begin, let’s start with a simple daily trading system
ZHAOLIANG70/SHUTTERSTOCK
that was tested on S&P 500 futures emini contract (ES)

Why count signals? data since 2002. This system waits for a daily low that
Trading system developers need to pass as much context is below the previous day’s low and then buys the next
and market environment information to trading systems open. We can quantify this signal as:
TECHNICAL ANALYSIS
Low[0] <= Low[1]
where [0] denotes the current bar and

[1] marks one bar ago.
The strategy then holds the trade for
one day, selling on the following day’s
open. This strategy, trading one lot of
ES, produces the hypothetical equity
curve over 20 years shown in Figure 1,
which is a nice-looking equity curve.
This simple trading idea produced
strong profits in 2008 and 2020 (both
years that saw dramatic lows in the
market). However, this strategy is far
from a smooth ride.
Signal count
A trader could look to improve this
signal by counting the number of oc-
currences over the past N days.
The low being below the previous FIGURE 1: EQUITY CURVE FOR SIMPLE STRATEGY. In this simple strategy, the trade is held
for one day, selling on the following day’s open. This strategy, trading one lot of ES, produces this
low tells us very little about the mar- hypothetical equity curve over 20 years. This simple trading idea produced strong profits in 2008
ket environment we are currently in. and 2020, but this equity curve is far from a smooth ride. Could the system be improved?
This leaves the trading system with
very little useful information. How-
ever, counting the number of days
the event (Low[0] <= Low[1]) has
occurred in the past five days gives
more insights.
If we require that at least four of the
last five days had their respective daily
low below the previous day’s low and
the most recent day is one of those four,
then we see a significantly improved
trading signal. A hypothetical equity
curve for this revised system over the
same 20 years is shown in Figure 2.
Spreadsheet
implementation
We can implement the concept of
counting occurrences using an Excel
spreadsheet (Figure 3).
First, we need to calculate the base FIGURE 2: EQUITY CURVE FOR SIMPLE STRATEGY, INCORPORATING SIGNAL COUNTS.
signal using an if statement comparing The trading strategy from Figure 1 could be improved by incorporating more information and rules
the current bar’s low to the previous into the strategy reflecting how often the signal occurs. A hypothetical equity curve for this revised
day’s. system over the same 20 years is shown here.
Second, calculate the open-to-open
difference to simulate buying the open and selling the to find the return for any given day with a signal. We
next day’s open. then sum all these profit & loss (P&L) values to plot the
Finally, multiply the signal by the open-to-open return equity curve.
MICROSOFT EXCEL
FIGURE 3: SPREADSHEET IMPLEMENTATION, SIGNAL COUNT INFORMATION. The concept of counting signal occurrences can be implemented
using an Excel spreadsheet. First, the base signal is calculated using an if statement comparing the current bar’s low to the previous day’s. Then the
open-to-open difference is calculated to simulate buying the open and selling the next day’s open. Finally, the signal is multiplied by the open-to-open
return to find the return for any given day with a signal. To plot the equity curve, sum all the profit & loss values. The second tab, named “combined
signals,” has an additional column to count the number of signals in the past five bars. If the sum of the two signal columns (basic and count) are equal
to 2, a new signal is produced.
Python implementation
We can also implement the concept
of counting signal occurrences
using the Python programming
language (Figure 4). Here are the
steps:
First, read in the data file into a
pandas dataframe. Next, calculate
the base signal and open-to-open
returns as separate dataframe
FIGURE 4: PYTHON IMPLEMENTATION, SIGNAL COUNT INFORMATION. The same concept can be
columns.
carried out using the Python programming language. In this sample Python code listing, the base signal Finally, multiply the signal by
is calculated and open-to-open returns as separate dataframe columns. The count signal is calculated the open-to-open returns and plot
in a new dataframe column by using pandas’ rolling sum function. To view the equity curve, plot the the cumulative sum to view the
cumulative sum after multiplying the signal by the open-to-open returns. equity curve.
To calculate the count signal in
The second tab, named combined signals, has an ad- a new dataframe column, we can use pandas’ rolling
ditional column to count the number of signals in the past sum function.
five bars. If the sum of the two signal columns (basic and
count) are equal to 2, we have a new signal—a count- Build Alpha implementation
based signal. Multiply this new signal by the returns to I can also implement the concept of counting signal oc-
get a P&L graph. currences in my own software, since that is the software
I use. Here is the procedure I follow:
Select the Low[0] <= Low[1] signal and set the max
hold time to 1 (see Figure 5).
One of the most overlooked To create the count signal, create a custom comparative
methods of improving indicator that uses the count function (see Figure 6).
indicators is to simply count
how often an event triggers in Final thoughts
a rolling window. There is no holy grail indicator, but creative ways of using
the same indicator can help improve performance. All
traders can have the same data before them, but those
who make the most
creative use of it will
outperform.
Single signals can
be great to get, but
don’t forget to check
alternative ways of
using the same signal,
such as counting its
occurrence, lagging
it, scaling it, or other
ways of using it.
David Bergstrom
is the founder of
Build Alpha. He has
over a decade of
professional market
experience, includ-
ing as market maker
BUILD ALPHA
and a quantitative
strategy developer FIGURE 5: SETTING UP THE BASIC STRATEGY IN BUILD ALPHA. To set up the basic trading strategy in the Build
at a high-frequency Alpha software, select the Low[0] <= Low[1] signal and set the max hold time to 1.
trading firm with a
Chicago Mercantile
Exchange (CME)
seat. He offers con-
sulting to institution-
al and professional
trading firms. He is
a self-taught pro-
grammer utilizing
C++, C#, and python.
He has a statistics
background special-
izing in data science,
machine learning,
and trading strategy
development. He can
be reached through
BuildAlpha.com. To
read more about
feature engineer-
ing and automatic
signal creation, visit
BuildAlpha.com.
FIGURE 6: SETTING THE COUNT FUNCTION IN BUILD ALPHA. To set up the function to count the signals in Build
The Excel spread- Alpha, create a custom comparative indicator that uses the count function.
sheet and code given
in this article are available in the Article Code section
of our website, Traders.com.
The “Crypto Winter” Two-Year Pattern
Cryptocurrencies And
Seasonality: Crypto Winter
Part 2
Did you know a pattern exists in cryptocurrencies where in and out a few times in a given period. They are very
two years of a bear market are often followed by two years patient as the market forms multiple peaks and crests.
of a bull market? This is a type of seasonality that you That type of approach is not the result of a lack of skill
could profit by, both on the short and long side. Here is and knowledge. Instead, it is based having on a trusted
what to look for to help spot the crypto winter pattern. analysis that is expected to play out over the long term.
Because of those different horizons that different traders
by Azeez Mustapha have, they typically opt for different types of strategies.
T
Traders can be classified into categories based on the
he cryptocurrency market is a technical space type of trading strategies used. There are scalpers, who
that requires understanding for an investor to spend only a few hours holding their trades. These trad-
be profitable. ers perform their analyses on the lower timeframes, such
It also helps to understand that different types as the 15-minute timeframe. Then there are daytraders,
of trading approaches are suitable for different who hold their trades for less than 24 hours. These types
types of traders. While some traders like to be of traders perform their analyses on higher timeframes
highly active all the time, others are very comfortable with than the scalpers do; their analysis revolves around the
ZOLOTOVEK/SHUTTERSTOCK
very little activity. Some traders are very nimble; they hourly chart. Then there are traders referred to as swing
go in and out of the market several times within a short traders. These traders may spend up to two weeks holding
period. This group of traders tries to benefit from every their trades. They typically perform their analyses on the
peak and crest in the market. Other traders only check four-hour chart. The last category and the most patient
CRYPTOCURRENCY TRADING
TRADINGVIEW
FIGURE 1: CRYPTO WINTER 2022 IN BITCOIN. News and fundamental factors can affect the rise and fall in the price of cryptos, though seemingly
not as much as the crypto winter effect. In March 2022, very positive news about cryptocurriencies was prominent and trending, and yet the market
continued to crash during this crypto winter.
of all is the position trader. They may hold their trades collapses have been reported to occur on occasion.
for months or even years. They perform their analyses These periods are known as “crypto winter.” In essence,
on the daily and weekly charts. “crypto winter” refers to a prolonged price decline.
Position trading isn’t easy in the currency markets Price declines and protracted price stability character-
because you can’t forecast forex easily in the long term. ize crypto winter.
However, in this article, I will describe an approach to
the cryptocurrency markets that may be quite suitable The “crypto winter” cycle
for position traders. With this approach’s longer time ho- The period of crypto winter is generally two years in a
rizon, it helps make position trading more manageable. four-year circle. The two-year bear market precedes two
years of a bull market (which is known as the “crypto
Seasonality in cryptocurrency summer”). The years 2018–2019 were a crypto winter.
Studies of the crypto market have shown that the crypto Then, two years later, another bearish winter would be
market tends to repeat certain moves over and over at expected from 2022–2023.
specific times. With a good understanding of the moves
that have been shown to recur in the crypto markets, a Fundamental analysis
smart trader can use the past as a tool to help predict The use of fundamentals is one way of analyzing the
the future. markets. Fundamental analysis is a technique to evaluate
With its recurring moves, the crypto market can be said the crypto market by examining the economic, social,
to have seasonal tendencies. Seasonality is a property of and political factors that might impact currency prices.
a time series in which the data goes through predictable In simple terms, positive external factors concerning
and recurring changes every year. “Seasonal” refers to cryptocurrency ought to cause an increase in the value
any predictable variation or pattern that recurs or repeats
during the year or from one year to the next. For example,
there is generally an expectation for some snow to fall
during the winter season of every year (depending on “Crypto winter” refers to
your geographical location, of course). And with that a prolonged price decline
expectation, people tend to prepare in advance for what lasting several weeks or
they will need in snow conditions. months.
Studies show that there are periods when the market
is very bearish and periods when it is very bullish. Price
FIGURE 2: CRYPTO WINTER 2022 IN RIPPLE COIN. The process of Bitcoin halving during crypto winters tends to affect other cryptocurrencies. In
this chart of Ripple Coin (XRPUSD), you can see the effect of Bitcoin halving.
FIGURE 3: CRYPTO WINTER 2018 IN ETHEREUM. January 2018 saw the start of a market crash with a bearish displacement. At the beginning of
February 2018, major cryptos such as Ethereum could be sold with sufficient risk allowances in place. By the end of 2018, a 200% profit could have
been made on the amount risked. This is an example of taking advantage of the crypto seasonal effect.
of crypto. Similarly, negative external factors concerning seems to have a more substantial effect on the crypto
cryptocurrency ought to cause a decrease in the value market than the fundamentals. The year 2022 (the year
of crypto. in which I am writing this article) provides a good ex-
However, the seasonal tendency of cryptocurrencies ample, as follows.
See the chart of Bitcoin (BTCUSD) in Figure 1. On
March 9, 2022, there was a news release from CoinDesk.
The news events were trending and prominent during
Price declines and March 2022. News headlines stated things like, “Ukraine
protracted price stability Has Received Close to $100M in Crypto Donations.”
characterize crypto winter. That article went on to describe how the country’s deputy
minister at the Ministry of Digital Transformation stated
that Ukraine’s president “shares our vision” that the use
of crypto could be an “economic breakthrough.”
You would expect such positive news to positively
influence cryptocurrency values, and that it ought to Studies of the crypto
result in an increase in the price of cryptocurrencies. market have shown that
However, the effect of the news was barely felt, as the the crypto market tends
market continued to crash during this crypto winter, as to repeat certain moves at
you can see in Figure 1. It appears that the seasonality
effect was stronger than the effect of the fundamentals
specific times.
at the time.
Bitcoin halving the bearish displacement in January 2018 to determine

The phenomenon of Bitcoin halving facilitates the oc- risk. At the end of 2018, a 200% profit would be made
currence of the crypto winter. Bitcoin halving can affect on the amount risked.
multiple cryptos, and you often will see many cryptocur- During a crypto winter, the trader could sell the top
rencies dip following a Bitcoin halving. 20 cryptos (that aren’t stablecoins) from the earlier
The very first Bitcoin halving took place on November part of the year and then buy them after a year or two.
28, 2012 after 210,000 blocks had been mined, and the (“Stablecoins” are digital currencies that are pegged to
reward was then reduced to 25 Bitcoins. After miners hit a “stable” reserve asset such as the US dollar or gold.
420,000 blocks, the second halving occurred on July 9, Stablecoins are designed to reduce volatility relative to
2016, and the payout for mining Bitcoin was reduced to unpegged cryptocurrencies such as Bitcoin.)
12.5 Bitcoins. On May 11, 2020, the third halving began, Due to the nature of position trading, traders are ex-
bringing the mining reward down to 6.25 Bitcoins. pected to “buy and forget” the coin until the anticipated
Two years after 2020—when the most recent halving date of closing the trade.
occurred—points to the year 2022. The seasonality effect of the crypto winter phenom-
The effect of the end of the Bitcoin halving on crypto enon can help traders to profit when used well. Crypto
winter can be seen in the chart of Ripple Coin (XRPUSD) winter is a repeating occurrence that traders can learn
in Figure 2. A trader who sold Ripple Coins during the and benefit from.
January 2022 bearish breakout would have profited more
than 100% of his risk. Azeez Mustapha is an analyst at Instaforex Companies
Group and a blogger at Advfn.com, and as well as a
Crypto winter’s entry and exit strategy freelance author for various trading publications. He
Figure 3 demonstrates an entry and exit approach the is a trading signals provider at some websites. He can
trader can use to take advantage of a crypto winter. With be reached via email at azeez.mustapha@analytics.
the knowledge that the crypto winter tends to occur ev- instaforex.com.
ery two years in a four-year cycle, a position trader can
anticipate a sell-off. Further reading
As seen in the chart in Figure 3, the month of January Mustapha, Azeez [2022]. “Cryptocurrencies And Season-
2018 revealed the initiation of the market crash with a ality: Crypto Summer,” part 1, Technical Analysis of
bearish displacement. At the beginning of February 2018, Stocks & Commodities, Volume 40: December.
major cryptos could be sold. Sufficient allowance should ‡TradingView
be made by the trader in the case of bullish motion before ‡See Editorial Resource Index
the bearish run. Enough risk allowance was placed above
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The Savvy Technician
CHARTING THE MARKETS
Stella Osoba, CMT, Esq., is an attorney, trader, and financial writer in New York,
NY, and is also the Senior Editor, Trading and Investing, for Investopedia.com. Her
work in financial litigation involving regulatory bodies and large multinational
corporations led to an interest in the financial markets, then technical analysis
and the psychological aspects of market behavior. She earned a CMT charter
in 2013 and was a director-at-large on the board of the CMT Association for
four years. This column will focus on recognizing and applying technical chart
patterns to trading with flexibility and astuteness for better decision-making in
trading. She can be reached at stellaosoba@gmail.com. Stella Osoba
YEAR-END MARKET ANALYSIS A selection of line charts see in the chart (Figure 1) that both
As we wave 2022 good-bye and look The Dow Jones Industrial Average indexes are rising. Note however, that
forward to 2023, it is always a good (DJIA), the granddaddy of indexes even though the DJIA has made a
idea to reflect on the past and plan and the most well-known, is as higher high, the DJTA has not. This
for the future. As traders and inves- good a place to start as any other. is something to watch in 2023.
tors, there is no better way to do this Superimposed on the chart (Figure Because of the ongoing scandal
than by using line charts to compare 1) is the Dow Jones Transportation surrounding the collapse of FTX
various markets, sectors, indexes, Average (DJTA). Trading Ltd., contagion has spread
and stocks. This is a relatively easy, When Charles Dow, the first editor to the wider crypto market. Bitcoin
versatile way to compare areas of of the Wall Street Journal and creator ($BTCUSD) has been in a slump for
the market and to get an overview of the whole of 2022 (see Figure 2). In
things that might have been missed One sector that has the final month of 2022, as the FTX
in the focus of interacting with the scandal spread, BTCUSD increas-
market on a daily basis.
outperformed the ingly diverged from the S&P 500
Knowing how to read the informa- general stock market in index (SPX). While the SPX is rising
tion presented and the discipline to 2022 is energy (XLE). (see circle in Figure 2) BTCUSD is
perform this activity is a useful skill falling, making the stock market a
to adopt in our ongoing journey of of the indexes that formed the foun- better place to have assets in than
mastering technical analysis research dation of Dow theory, was observing bitcoin. Will this continue to play
concepts. stock market action, he said that to out in 2023?
The rest of this article will be a confirm a trend, the two main indexes, One sector that has outperformed
selection of charts that I have gath- which at the time were DJIA and the general stock market in 2022 is
ered, and an explanation of what DJIT, must confirm. energy (XLE). Figure 3 clearly shows
they reveal. In the final months of 2022, we can this. While XLE (black line) has risen
STOCKCHARTS.COM
FIGURE 1: DOW JONES TRANSPORTATION INDEX (DJIT) FIGURE 2: BITCOIN ($BTCUSD)

FIGURE 3: ENERGY (XLE) FIGURE 4: COPPER CORRELATED WITH THE S&P 500
FIGURE 5: NUCOR CORP. (NUE) COMPARED WITH THE MATERIALS FIGURE 6: TECHNOLOGY (XLK) SECTOR HAS TIGHT CORRELATION
(XLB) SECTOR WITH THE SPX
for the bulk of 2022, recently making to rise into 2023 and the Fed contin-
new highs, the SPX has struggled and The DJIA is comprised ues to fight it by increasing interest
has recently formed what is looking of 30 of the largest rates, the possibility of further price
like a W-shaped bottom. blue-chip companies lows in both the SPX and the price
Copper is widely used in most sec- of copper is likely.
tors of the economy, including elec-
trading in the market, We can also take promising sectors
tronic product transmission, power while the SPX is and compare them with strong stocks
generation, building construction, comprised of 500 of in that sector. In Figure 5, Nucor
industrial machinery, and many other the biggest companies. Corp. (NUE) is compared with the
industries in many different sectors. materials (XLB) sector.
Because of its widespread applica- There are drawbacks to using the As XLB has began to recover in
tion, it is often used as a gauge of price of copper alone relative to the 2022, NUE, showing strength, never
the health of the general economy. In market as an indicator of the health really fell significantly over the past
insider lingo, it is often referred to as of the economy, because if there is an year and is currently trading at a
“Dr. Copper” and it is usually a lead- increased demand for copper because higher high.
ing indicator. If orders for copper are of a shortage in the metal, the price The technology sector, represented
rising, it is considered an indication will rise, making it less of a reliable by the ETF XLK, which in good
that the economy is strong. indicator. times is often the strongest and most
Figure 4 shows the performance of In our current inflationary environ- popular sector, shows its tight correla-
copper correlated with the S&P 500 ment, we are likely in the late stages tion with the SPX (see Figure 6). It
index during 2022. of an expansion. If inflation continues rose in a strong trend into 2021 and
FIGURE 7: DJIA & SPX TIGHT CORRELATION FIGURE 8: SPX VS. USD
plunged with the SPX in 2022. It is total number of shares outstanding. often falling and when the dollar is
currently showing signs of recovery An index divisor is then used to arrive falling, the SPX is rising.
in line with the wider index. at a final figure.
The DJIA is comprised of 30 of Notwithstanding the differences in The value of charts
the largest blue-chip companies the way these popular indexes are cal- This article uses a sampling of charts
trading in the market, while the SPX culated, they often move in concert, as to show how much can be achieved
is comprised of 500 of the biggest we can see from Figure 7. It is worth by taking different markets, sectors,
companies. The DJIA is a price- noting as we move into the new year and securities and comparing them
weighted index, which means that that though both indexes are moving to derive information and also to
the index is calculated by adding the higher, the DJIA has made a higher plan strategies for future trading.
stock price of the 30 companies and high but the SPX has not. It is a versatile and very useful tool
dividing by a divisor. The SPX is a Finally, Figure 8 shows the SPX and that we have available as technical
market capitalization-weighted index the US dollar. The chart shows the analysts.
which means that the share price of lack of correlation between the two.
each company is multiplied by the When the dollar is rising, the SPX is
Futures For You

GARNER and backing; most notably, the assets or, arguably, holding wealth off the
Continued from page 29 are not under the influence of the grid. Yet, FTX was a centralized
Fed. However, in the end, one could crypto exchange. Customers of FTX
statements. Obviously, electronic argue that none of those premises learned that using a crypto exchange
information is timelier and more reli- held true. For instance, Bitcoin and located in the Bahamas wasn’t a solu-
able than data printed on paper. other tokens are traded like risk as- tion to avoiding the global financial
In the Wild West of cryptocurrency sets. They often behave similarly to system and central bankers.
trading, no such segregation rules ex- stocks and generally with a negative Now that we’ve outlined the basics
ist. Of course, it should be standard correlation to the US dollar. Thus, the of fund segregation compliance, in
practice for a brokerage firm to avoid short-term fate of Bitcoin was at the next month’s column, we will take a
using customer deposits to pay bills, hands of central bankers after all. The deeper look into how crypto traders
meet margin calls, etc. Yet, no regula- irony extends to the idea that Bitcoin can mostly eliminate counterparty
tory bodies are making and enforcing fans are seeking assets that are not risk by using futures contracts rather
such commonsense rules. Ironically, centralized. In other words, they are than crypto brokerages.
one of the allures of cryptocurrencies not part of an exchange; instead, they
is the lack of government issuance are a means of making transactions
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
DECIDING BETWEEN STRIKE PRICES As a result, the bulk of call option the long term, your odds of success
I typically buy call options. But I am buyers tends to congregate around the will remain low.
having trouble deciding which strike at-the-money strike, believing that Alternatively, if you think that
price to buy. Are there any guidelines they offer the best tradeoff between Stock XYZ is about to rise in price,
to decide which is best? the cost of entry and the probability but you are not sure how far it will
“Best” is in the eye of the beholder. of success. But the reality is, no one go, nor how long it might take to
The key is understanding the risk/ strike (in, at, or out of the money) is get there, then a longer-term in-the-
reward tradeoff among the various the “right” choice in every case. money call may be your best bet. This
strikes. For this article, we will focus will give the trade more time to work
solely on call options. But everything The first question is, out and make it less susceptible to the
here will also apply (though inversely) “What are your ravages of time decay (remember,
to put options. expectations?” every option will lose all of its time
For actively traded securities, Before buying any call option, you premium by expiration, with time
strike prices can range from deep- first must assess your expectations for decay accelerating as expiration
in-the-money (that is, the strike the underlying security. Your expec- draws closer).
price is well below the price of the The second question is, “Which
underlying security) to far-out-of- strike makes the most sense, given
The reality is that
the-money (that is, the strike price is my expectation?”
well above the price of the underlying
no one strike price The best way to address this is
security. Deep-in-the-money calls (in, at, or out of the to fully understand the difference
have certain relative disadvantages money) is the “right” in behavior between in-the-money,
compared to other strikes. They are choice in every case. at-the-money, and out-of-the-money
the most expensive to buy, offer the strikes. For our examples, we will
least leverage, are often very thinly tations may significantly influence focus on Cisco Systems (CSCO). On
traded, and sometimes have wide bid/ the strike you purchase. For example, December 12, with CSCO trading
ask spreads. suppose you absolutely, positively at $49.30 a share, we will focus on
At the far end of the spectrum, think Stock XYZ is set to explode January options expiring in 39 days
far-out-of-the-money call options higher in the near term, and your on January 20.
are typically dirt cheap and, as such, primary objective is to maximize
have something akin to an “a moth profitability. In that case, an out-of- The in-the-money strike
to the flame” appeal to many novice the-money option is most likely to First, let’s look at a deep-in-the-money
traders. While they are inexpensive help you achieve that objective. But call option. Figure 1 displays the par-
and offer the potential for massive this assumes that your expectation ticulars and risk curves for buying 1
leverage, the problem is that the turns out to be correct. If XYZ falls Jan20 2023 CSCO 40 strike price call
underlying security must typically apart instead, the OTM call will col- option at the ask price of $9.55.
make an uncharacteristically huge lapse quickly in price. If the total of Note the delta value of 96.77. That
move for the option to pay off. Bottom all your option trades fits this “this tells us that this position is roughly
line: the mathematical probability of is the big one” scenario, you may oc- equivalent to buying 100 shares of
success is exceedingly low. casionally hit a big winner, but over CSCO (which would have a delta of
OPTIONSANALYSIS.COM Explore Your Options
FIGURE 1: RISK CURVES AND TRADE DETAILS, DEEP-IN-THE-MONEY FIGURE 2: RISK CURVES AND TRADE DETAILS, AT-THE-MONEY CALL
CALL OPTION. The example here buys one Jan20 2023 CSCO 40 strike OPTION. The example here buys one Jan20 2023 CSCO 50 strike call
call option at the ask price of $9.55. option at the ask price of $1.12.
The breakeven quickly if the price advances. On

price is only 0.5% the other hand, the breakeven price
above the current is further away (3.7% versus 0.5%
stock price. How- and time decay will become much
ever, trading is more of an issue if the price does
relatively thin, not move higher relatively quickly
with only five (the 50-call position will lose −$1.79
contracts trad- per day versus −$0.43 per day for the
ing hands on 40-call due to time decay).
the most recent
day. The bottom The far out-of-the-money
line: If you want strike
point-for-point Now let’s look at the far out-of-the-
movement with money call option. Figure 3 displays
the stock, this is the particulars and risk curves for
FIGURE 3: RISK CURVES AND TRADE DETAILS, FAR-OUT-OF-THE- the most direct buying 1 Jan20 2023 CSCO 60 strike
MONEY CALL OPTION. The example here buys one Jan20 2023 CSCO
60 strike call option at the ask price of $0.02. way to get it via call option at the ask price of $0.02.
options. This is essentially the equivalent
of a financial markets lottery ticket.
The at-the-money strike A meager cost of entry, a maximum
Now let’s look at the at-the-money amount of potential payoff, and an
call option. Figure 2 displays the exceedingly low potential for suc-
particulars and risk curves for buying cess. The cost to buy a 1-lot is a mere
1 Jan20 2023 CSCO 50 strike call $2. Delta tells us that this is roughly
option at the ask price of $1.12. equivalent to buying 0.8 shares
FIGURE 4: COMPARING KEY VALUES FOR The cost is significantly reduced of CSCO. The breakeven price of
VARIOUS CHOICES OF CALL OPTIONS. It’s from the in-the-money 40 strike price $60.02 is a daunting 21.7% above the
helpful to compare potential trades side-by-side. ($112 per 1-lot versus $955). Note that current price of CSCO shares. The
This compares the three trade examples from
Figures 1, 2, and 3. trading volume is much more active odds of success are low; however,
(3,442 contracts traded versus 5). if you expect that CSCO will soar
100). The difference is that the call Note that the much higher gamma well beyond $60 a share in the next
option costs only $955 to buy versus (11.145 versus 1.163) tells us that this month or so, this option can maximize
$4,930 to buy 100 shares of CSCO. call will gain value (i.e., higher deltas) profitability.
Explore Your Options
FIGURE 5: RISK CURVE COMPARISON, 40-STRIKE VS. 50-STRIKE. FIGURE 6: RISK CURVE COMPARISON, 40-STRIKE VS. 60-STRIKE.
You can compare risk curves to help decide which call option to purchase. The example here compares potential trades with a strike price of $40 versus
The example trade here is based on one Jan20 2023 CSCO call option, $60 for one call option on CSCO stock expiring January 20, 2023.
with a strike price of $40 versus $50.
Comparing apples-to- Summing up

apples The bottom line
Figure 4 compares the various factors is this: The lower
to consider for each potential trade. the call option
To better understand the differ- strike price, the
ences between the positions: greater the cost
and the greater
• Figure 5 displays the risk curves the probability of
for the 40-strike versus the profit compared
50-strike to higher strikes.
FIGURE 7: RISK CURVE COMPARISON, 50-STRIKE VS. 60-STRIKE.
• Figure 6 displays the risk curves The higher the The example here compares potential trades with a strike price of $50 versus
for the 40-strike versus the call option strike $60, for one call option on CSCO stock expiring January 20, 2023.
60-strike price, the lower
• Figure 7 displays the risk curves the cost, and the higher
for the 50-strike versus the the potential for a
60-strike larger payoff, but the
far lower the prob-
Finally, Figure 8 displays the ex- ability of success.
pected $ and % returns for each strike
price if held until expiration, based
on the price of CSCO at the time of FIGURE 8: COMPARISON OF EXPECTED RETURN. Comparing
expiration. side-by-side the expected reward for each potential call option trade
(if held until expiration) is helpful.
UNGER/OUTSIDE BAR furTher reaDing

Continued from page 22 Unger, Andrea [2021]. The Successful Trader’s Guide To
Money Management: Proven Strategies, Applications,
Society of Technical Analysis, a branch of IFTA), and And Management Techniques, Wiley Trading.
speaks throughout Europe, America, Australia, and [2021]. The Unger Method: The Winning Strategy
Asia. He may be reached at Andrea@UngerAcademy. Of The 4-Time World Trading Champion, The Boss
com. The Unger Academy provides services to traders, Books.
including individuals, to help them improve their ap- [2022]. “Filters On The Test Bench,” Technical
proach to trading (more information can be found at Analysis of StockS & commoditieS, Volume 40:
https://autc.pro/tasc2). November.
‡MultiCharts
The code given in this article is available in the Article ‡See Editorial Resource Index
Code section of our website, Traders.com.

•
Traders.com  S&C Magazine 
This month, instead of focusing on a particular arti-
Traders’ Tips
cle in this issue, we asked the software developers
who regularly contribute to this section to submit At Traders.com you can also right-click on any
something on a topic of their own choosing, whether chart to open it in a new tab or window and view
that be an idea, technique, or program feature. So the chart at a much larger size.
here, you will find some custom coding and some
helpful pointers for implementing a technique or for The Traders’ Tips section is generally provided to
using a platform feature. help readers implement a selected technique from
an article in this magazine. The entries here are
Code for the following Traders’ Tips selections is contributed by software developers or program-
posted at the magazine's website here: mers for software that is capable of customization.
trabar Efficiency Ratio',

'IER (TASC)', false, precision = 4)
F TRADINGVIEW: FEBRUARY 2023 TRADERS’ TIPS CODE
// Libraries used by the script.
Here, we present some TradingView Pine Script code that import PineCoders/Time/3 as PCtime
implements a directional version of Perry Kaufman’s effi- import PineCoders/lower_tf/3 as PCltf
ciency ratio calculated from intrabars, that is, bars at a lower
timeframe than the chart’s. //#region ————————————————————
Constants and Inputs
The intrabar efficiency ratio (IER) is designed to gauge
// ————— Constants
the “efficiency” of intrabar price movement. This is achieved // Colors
by calculating the ratio of single-bar price changes for the color GRAY = #80808080
current chart’s timeframe to the sum of absolute intrabar color GRAY_LT = #f5f3f3
changes. The results are smoothed, which gives an indica-
// Strings
tion of how efficient changes are on the current chart’s time-
string ltfString = "2"
frame for each bar relative to the lower timeframe “noise” on string TAB_TXT = "Uses intrabars at {0}\nAvg intrabars
an average basis. In addition, unlike the standard definition per
of the efficiency ratio, the IER calculation preserves direc- chart bar: {1,number,#.#}\nChart bars covered: {2} of {3}"
tional information that
allows it to be used as a
momentum oscillator.
// TASC Issue: Janu-

ary 2023 - Vol. 41,
Issue 2
// Article: Intrabar
Efficiency Ratio
// Article By: Trad-
ingView
// Language:
TradingView's Pine
Script™ v5
// Provided By: Pine-
Coders, for trad-
ingview.com
// For a more complete

version of this indica-
tor, see:
// https://www.trad-
ingview.com/script/
o8tRZCzT-Intrabar-
Efficiency-Ratio/
//@version=5
indicator( FIGURE 1: TRADINGVIEW. The intrabar efficiency ratio (IER), which is a directional version of Perry Kaufman’s efficiency ratio, is
'TASC 2023.02 In- designed to gauge the “efficiency” of intrabar price movement. The IER calculation preserves directional information that allows it to be
used as a momentum oscillator.

mR := math.max(nz(mR), math.abs(maMid)) * 0.6
// Error Messages float upper = math.max(0, maMid)
string NI_ERR1 = float lower = math.min(0, maMid)
"No intrabar information exists at the '{0}' timeframe." grad = color.from_gradient(maMid, -mR, mR, icLine1,
string NI_ERR2 = "This script uses intrabars; icLine2)
the chart's timeframe must be >= 5min." plot(maMid, "Mid MA", grad, 1, plotStyle1)
plot(maMid, "Mid MA", color.new(grad, 75), 3, plotStyle1)
// ————— Inputs P1 = plot(upper, "", grad, 1, plotStyle2, display = plotDN)
string in10 = "Line" P2 = plot(lower, "", grad, 1, plotStyle2, display = plotDN)
string in11 = "Fill" TSW = maMid >= 0
string in12 = "12" cUP = TSW ? icFill2 : icFill3
string in20 = "20" cLO = TSW ? icFill1 : icFill2
color icLine1 = input.color(#00BCD4AA, in10, "", in10) fill(P1, P2, TSW ? mR : 0, TSW ? 0 : -mR, cLO, cUP, "")
color icLine2 = input.color(#FF5252AA, "", "", in10) hline(0)
int lenInput = input.int(20, "Length", inline = in10)
color icFill1 = input.color(#00BCD4AA, in11, "", in11) // Information box.
color icFill2 = input.color(#fffc52aa, "", "", in11) if showInfoBoxInput
color icFill3 = input.color(#FF5252AA, "", "", in11) var table infoBox = table.new(infoBoxYPosInput + "_" +
infoBoxXPosInput, 1, 1)
bool rankWeightInput = input.bool(false, string formattedLtf = PCtime.formattedNoOfPeriods(
"Weigh using relative close changes", "", in12) timeframe.in_seconds(ltfString) * 1000)
int rankLengthInput = input.int(100, "", inline = in12) string txt = str.format(TAB_TXT, formattedLtf,
avgIntrabars, chartBarsCovered, chartBars)
bool showInfoBoxInput = input.bool(true, "Show informa- if barstate.isfirst
tion box") table.cell(infoBox, 0, 0, txt,
string infoBoxSizeInput = input.string("small", "Size", text_color = infoBoxTxtColorInput,
["tiny","small","normal","large","huge","auto"], "", in20) text_size = infoBoxSizeInput,
string infoBoxYPosInput = input.string("bottom","↕", bgcolor = infoBoxColorInput)
["top","middle","bottom"], "", in20) else if barstate.islast
string infoBoxXPosInput = input.string("left", "↔", table.cell_set_text(infoBox, 0, 0, txt)
["left", "center", "right"], "", in20)
color infoBoxColorInput = input.color(GRAY, "", "", in20) // Runtime errors.
color infoBoxTxtColorInput = input.color(GRAY_LT, "T", if ta.cum(intrabars) == 0 and barstate.islast
"", in20) runtime.error(str.format(NI_ERR1, ltfString))
//#endregion else if timeframe.in_seconds() < 5 * 60
runtime.error(NI_ERR2)
//#region ———————————————————— //#endregion
Calculations
// ———— IER This indicator is available on TradingView: https://www.
// Get array of 'close' to 'close' changes in intrabars. tradingview.com/script/o8tRZCzT-Intrabar-Efficiency-Ra-
array<float> travels = request.security_lower_tf(
syminfo.tickerid, ltfString, math.abs(ta.change(close))) tio.
float totalTravels = array.sum(travels) An example chart is shown in Figure 1.
// Get 'close' to 'close' change of the chart's last two bars. —PineCoders, for TradingView
float chartBarChange = nz(ta.change(close)) www.TradingView.com
// Weight on relative size of the 'close' to 'close' change.
float weight = switch
rankWeightInput => ta.percentrank(
math.abs(chartBarChange), rankLengthInput) /
100.0
=> 1.0 F WEALTH-LAB: FEBRUARY 2023 TRADERS’ TIPS CODE
// Calculate IER and its MA. This month, we’d like to highlight one of Wealth-Lab’s stron-
float ier = nz(chartBarChange / totalTravels) * weight
float maMid = ta.alma(ier, lenInput, 0.85, 6) gest points: chart pattern recognition.
With our Chart Patterns extension, all the “textbook”
// ———— Intrabar stats patterns that traders are familiar with—such as the cup &
[intrabars, chartBarsCovered, avgIntrabars] = handle, double bottom, triangles and flags—can be automati-
PCltf.ltfStats(travels) cally detected and drawn on charts. You can even encode a
int chartBars = bar_index + 1
//#endregion chart pattern of your own invention—say, the fivefold top—
and let the application scan for it.
//#region ———————————————————— Vi- Progress never stops though. What we consider the kill-
suals er feature of Wealth-Lab’s Chart Patterns extension are
plotStyle1 = plot.style_line grid-based patterns, which we call PriceGrids. Think of it
plotStyle2 = plot.style_linebr
plotDN = display.none as computer vision, simply put. A region of a price chart
var float mR = 0.0 is divided into a 2D matrix (grid) and the grid cells where

prices are found are
marked with “one”
bit and the blank
cells as “zero” bits.
This process cre-
ates a visual pattern
of the price dynam-
ic. Encoded into a
“fingerprint,” it can
then be matched by
an indicator return-
ing a confidence
factor value that
reflects how closely
a pattern matches
the current price
dynamics. As the
indicator calculates
FIGURE 2: WEALTH-LAB. Here is an example of defining a pattern on a daily chart of Oracle (ORCL) using the PriceGrids feature of Wealth- values bar-by-bar, a
Lab’s Chart Patterns extension. high confidence lev-
el may suggest that
the PriceGrid pat-
tern has emerged.
Defining such
patterns is easy:
Spot what you think
is a price pattern,
drag the mouse
pointer across a
section of the chart
and let Wealth-Lab
instantly create a
PriceGrid for you
FIGURE 3: WEALTH-LAB. Once a pattern is defined, you can test the pattern on symbols you choose. Here’s an example of testing a newly (Figure 2). But be-
defined pattern on Goldman-Sachs stock (GS).
ware: The process
can get addicting!
Figure 3 shows an example of testing the new pat-
tern on a stock.
And of course, everything of that can be done
without having to write a single line of code. Drop-
ping the “Chart Patterns” or “PriceGrids” rule
onto a Building Block makes you one step closer
to building a strategy that detects chart patterns
(Figure 4) and trades them automatically in your
brokerage account.
—Gene Geren (Eugene)
Wealth-Lab team
www.wealth-lab.com
F OPTUMA: FEBRUARY 2023 TRADERS’ TIPS

FIGURE 4: WEALTH-LAB. Once you define and test a pattern, you can easily mock up a trading CODE
strategy by dropping the “Chart Patterns” or “PriceGrids” rule onto a Building Block. This shows an One of the more interesting techniques that we find
example of mocking up a trading system based on the new pattern.

in W.D. Gann’s original
hand-drawn charts is that
he often plotted the posi-
tion of planets that he
thought were influential
to that security—what we
call Gann planetary lines
(GPLs).
The method he used
was to take the planet’s
longitudinal angle (from
either a heliocentric or
geocentric perspective)
and convert it into a price
using a scaling factor to
have it display in the ap-
propriate price range.
This means that 180
degrees could be plotted FIGURE 5: OPTUMA. This example of Gann planetary lines (GPLs) shows the 180-degree GPLs of Mars (in red). The method takes
at $1.80, $18.00, $1800, or the planet’s longitudinal angle and converts it into a price using a scaling factor to have it display in the appropriate price range. Optu-
ma users with the Astro module can use an Optuma script to get alerts based on when price is approaching one of the GPL levels.
even 18c. The next level is
then plotted 360 degrees
away ($3.60, $36.00, etc.
depending on the scal-
ing).
The example in Figure
5 shows the 180-degree
GPLs of Mars (in red).
Gann planetary line

alerts
When looking at these
plots, there are times
when they behave as very
effective support and re-
sistance lines. Alan Oliver
(TradingWithGann.com)
has done a detailed study
on these lines and which
planets work best with
which markets. FIGURE 6: OPTUMA. The “ASPECTS” function takes the angles and the price angles (P1 & G1) and allows the user to set a
tolerance—or orb—and the aspects to be considered. This can then also be used in scans to find any security that is coming up
The difficult part has against one of these planetary lines.
always been to get alerted
when price is approach- can scan lots of different securities.
ing one of these levels (see Figure 5). For Optuma clients The final “ASPECTS” function takes the angles and the
with the Astro module, the following script can do just that: price angles (P1 & G1) and allows us to set a tolerance—
P1=PVAL(PLANET=[Mars]); or orb—and the aspects to be considered (you can do all of
G1=GPA(); them, with “conjunction” being 360 degrees, “opposition” at
ASPECTS(P1, G1, ORB=20.0, ASPECTS=[Conjunction,O 180 degrees, “square” at 90 degrees, and so on).
pposition], EXACT=False) This can then also be used in scans to find any security
that is coming up against one of these planetary lines.
The first line of code gets the planet’s angle for each day —support@optuma.com
(i.e., Mars).
The second line of code is a new function that turns price
into an angle based on the GPL rules. You can set your own
scaling unit in this, but leaving them set to “auto” means it
FIGURE 7: ESIGNAL. The Market Screener Plus FIGURE 8: ESIGNAL. Here’s an example of selecting one of the present filters (Average_Xover).
feature of eSignal, which is included with a sub-
scription to eSignal, allows the user to integrate
technical analysis and fundamental data to scan
the markets. Using the dropdown menu at the top
of the window, the user can select from 20 preset
filters that can be used as a template to create
custom scans.
F ESIGNAL: FEBRUARY 2023

FIGURE 9: ESIGNAL. Descriptions of the different preset filters available are provided onscreen to provide an idea of
TRADERS’ TIPS CODE
the type of scan the filter will perform.
Here, we’ll focus on a robust and
useful tool in eSignal to quickly scan
the market for trading opportunities. Market Screener Plus of exchanges in the left panel. Choose the exchange you
(included with a subscription to eSignal) allows the user to wish to scan, then click apply (Figure 11).
integrate technical analysis and fundamental data to scan the The scan button can be used to periodically update the
markets. You’ll find 20 existing filters (that is, preset defaults) results, which are displayed in the window (Figure 12).
that can be used as a template to create custom scans. These To create a new filter from scratch, click the menu icon
filters can be selected using the dropdown menu at the top of (highlighted by the red box drawn on Figure 13) followed by
the window (see Figure 7). “new filter.” Choose “save filter as” to assign the filter a new
In the following example, we’ll use the preset default ti- name and save it.
tled Average_Xover. Once you have selected a default, click Back in the left panel, choose from the existing catego-
the “filter” icon (see Figure 8). The default filters all have ries:
descriptions to give you an idea of the type of scan being
performed (Figure 9). New expression—“Expressions” allow you to compare the
In the left-hand panel you can select additional scan cri- open, high, low, close, previous, volume, and more using
teria. In this example, we’ll select “exchanges” and click mathematical operators (>, <, =, etc.).
the add criterion button (Figure 10). Alternatively, you can Bar values—These include open, high, low, close, previous,
doubleclick the category to add it. Please note that by de- and volume.
fault, one exchange is available. In order to scan multiple Fundamental—EPS, 52-week high/low, PE ratio, revenue,
exchanges, you will need to upgrade to either three or five and sector are just some examples of the 45 fundamental
exchanges, which is an data fields available for Market Screener Plus.
add-on service. Technical analysis—Use a library of technical analysis
From here, click add studies (33 in total) to create advanced scans of the market
exchanges to reveal a list based on your custom settings.
FIGURE 10: ESIGNAL. You can select ad-

ditional scan criteria in the panel at left by
selecting a choice and clicking the “add cri-
terion” button (or doubleclick the category FIGURE 11: ESIGNAL. Click “add exchanges” to reveal a list of exchanges in the left panel. Choose the exchange you wish
to add it). to scan, then click “apply.”

FIGURE 12: ESIGNAL. The scan button can be used to periodically update the results, which are displayed in the window.
Since Market Screener Plus provides the same functional-

ity as a watchlist window, you can also run built-in studies,
formulas, and custom expressions (based on any of the val-
ues in the Market Screener columns) to further analyze and
sort the results of your scans.
In summary, we think you’ll find Market Screener Plus
to be an invaluable tool to scan and analyze entire markets
(domestic and global) using the very same tools applied to
any other window in eSignal.
—ICE Data Services, eSignal.com
MARKET RAP
FIGURE 13: ESIGNAL. To create a new filter from scratch, click the
menu icon (highlighted by the red box) followed by “new filter.” Choose
“save filter as” to assign the filter a new name and save it.
TOMASINI/MARKET RAP 9, or 12 months. proximate it, adding the new price to

Continued from page 23 If I could add a grain of salt to this the previous day’s average and again
discussion, I have always wondered dividing by 200. Dividing by 200 is
will happen. Obviously, we cannot why everybody takes for granted that easier to calculate than dividing by
expect to know in advance “what” a 200-day moving average is a simple 250 or 254. That could be the rea-
will happen. It is enough to know arithmetic moving average and not an son why we always meet the simple
“when” something will happen. exponential moving average or some 200-day moving average and not the
Another theory for why these two other exotic form of moving average exponential one.
moving averages are effective to pay such a triangular or adaptive. Here, And frankly, it is endearing to
attention to is the idea that the 50-day there may be a historical explanation: think that we are analyzing financial
moving average could represent a Since the 200 MA has been around markets today with a tool that dates
three-month period and the 200-day for almost a century, we need to look back a century and that shaped the
moving average could represent the back at the times when computers did history of technical analysis, probably
one-year time window. There are not exist. In those times, it was easy mostly due to its ease of calculation
indeed many market participants to calculate a simple moving aver- in an era when computers were still
who believe in the importance of age with a shortcut: You calculate to be invented and charts were drawn
seasonal factors in stock markets, so just once the 200-day mathematical by hand.
that according to this interpretation, average of prices, since for the days
prices would move in cycles of 3, 6, that follow, it will be enough to ap-
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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 (Mar ’23) CME 6 13.8 2 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>>
Ultra T-Bond (Mar ’23) CBOT 5.2 6.6 2 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>>
10-Year T-Note (Mar ’23) CBOT 2.1 8.9 6 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
30-Year T-Bond (Mar ’23) CBOT 3.6 7.1 3 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
5-Year T-Note (Mar ’23) CBOT 1.5 9.4 10 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
Ultra 10-Year T-Note (Mar ’23) CBOT 2.8 7.9 4 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
Russell 2000 E-Mini (Mar ’23) CME 3.6 7.9 2 ••••••••••••••••••••••••••••••••••••••••••••••••
2-Year T-Note (Mar ’23) CBOT 0.6 8.2 11 ••••••••••••••••••••••••••••••••••••••••••••••
Crude Oil WTI (Feb ’23) NYMEX 10.1 6.6 1 •••••••••••••••••••••••••••••••••••••••
Soybean (Mar ’23) CBOT 2.7 5.9 3 •••••••••••••••••••••••••••••••••••••••
Soybean Meal (Mar ’23) CBOT 1 2.7 2 •••••••••••••••••••••••••••••••••••••••
Nasdaq 100 E-Mini (Mar ’23) CME 7.7 15.7 2 ••••••••••••••••••••••••••••••••••••
Corn (Mar ’23) CBOT 7.6 14.1 10 •••••••••••••••••••••••
3-Month SOFR (Mar ’23) CME 0.3 6.8 14 ••••••••••••••••••••
Euro FX (Mar ’23) CME 2.2 14.1 8 ••••••••••••••••••••
Gold (Feb ’23) COMEX 3.8 18.4 5 ••••••••••••••••••
3-Month Eurodollar (Mar ’23) CME 0.3 6.7 14 ••••••••••••••
S&P 500 VIX (Jan ’23) CFE 52.7 22 3 •••••••••••••
Sugar #11 (Mar ’23) ICE/US 6.4 11.4 13 ••••••••••••
Wheat (Mar ’23) CBOT 9.7 10.8 5 •••••••••••
30-Day Fed Funds (Jan ’23) CBOT 0.2 4.6 10 ••••••••••
Silver (Mar ’23) COMEX 7.7 14.8 3 •••••••••
ULSD NY Harbor (Feb ’23) NYMEX 9.9 12.3 2 •••••••••
Dow Futures Mini (Mar ’23) CBOT 8 17.5 2 ••••••••
Gasoline RBOB (Feb ’23) NYMEX 9 9.6 2 ••••••••
Cotton #2 (Mar ’23) ICE/US 11.3 14.1 5 ••••••
High Grade Copper (Mar ’23) COMEX 6.6 14.5 4 ••••••
Japanese Yen (Mar ’23) CME 3.6 12.3 6 ••••••
Live Cattle (Feb ’23) CME 2.8 5.9 6 ••••••
Coffee (Mar ’23) ICE/US 11.8 21.4 5 •••••
British Pound (Mar ’23) CME 4 24.1 13 •••
Hard Red Wheat (Mar ’23) KCBT 8.8 14.1 6 ••• CBOT Chicago Board of Trade, Division of CME
Natural Gas (Jan ’23) NYMEX 18.3 20.7 4 ••• CFE CBOE Futures Exchange
Australian Dollar (Mar ’23) CME 4.6 23.7 13 •• CME Chicago Mercantile Exchange
Canadian Dollar (Mar ’23) CME 2.1 15.6 18 •• COMEX Commodity Exchange, Inc. CME Group
Crude Oil Brent (F) (Feb ’23) NYMEX 9.2 11.5 3 •• ICE-EU Intercontinental Exchange-Futures - Europe
Lean Hogs (Feb ’23) CME 5.7 10.2 9 •• ICE-US Intercontinental Exchange-Futures - US
Mexican Peso (Mar ’23) CME 5.7 24.9 30 •• KCBT Kansas City Board of Trade
Palladium (Mar ’23) NYMEX 15.2 16 1 •• MGEX Minneapolis Grain Exchange
Canola (Mar ’23) ICE/CA 8.9 18.5 21 • NYMEX New York Mercantile Exchange

Cocoa (Mar ’23) ICE/US 6.3 28.3 31 •
2302
Feeder Cattle (Mar ’23) CME 3.6 8.2 4 •
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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formation on the Internet for
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including investing, trading,
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can even find a good amount 3. StockCharts.com StockCharts.com, Inc.
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These are the 10 Online Trading Services viewed most often on the Traders’ Resource
The listed online services may offer charting, price website, in order of clicks received. This is not an editorial rating or ranking. For more
quotes, and financial news and information; others information on specific products and services, try checking store.Traders.com for ar-
offer a more specialized service that may be useful chived S&C product reviews.
to investors and traders. Features may include stock
screening, articles, discussion forums, online support, courses and seminars, software, publications, trading systems,
and more. and more. We hope this will help you learn about products
to help in your trading endeavors.
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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
TRADING GAP OPPORTUNITIES of the market’s gains during bull subway in 2005 or a private plane
THROUGH RELATIONSHIP-BASED market cycles occur in the overnight hitting an office tower in Milan, Italy
INSTRUMENTS gaps. However, the behavior from in 2002, or of Abu Dhabi bailing out
Most traders are familiar with market open to close of the day session can Dubai from defaulting on its bond in
gaps, and some know how to trade be quite different than that. In recent 2009. Each of these events caused
them successfully. These past few years we have witnessed that market amazing discounts at the US market
years have been very generous to participants overall pay too much open, and the market subsequently
traders in supplying frequent gaps for the opportunity to profit in long rallied to fill the gap and more. None
to trade on. I propose that there are positions. They chase performance of those events were even close to a
more to come in 2023, which would or speculate on outcomes and “pay direct hit on the US as was the terrorist
be good news for us production-based up” premarket and at the open. Often attack on the World Trade Center in
and probability-based traders. It is that opening price is the high of the 2001. That attack of September 11,
my opinion that due to current events day—and a gap fill ensues. 2001 represented a massive catalyst
globally, we will see an abundance Likewise, due to bad news, a deep that was both political and economic.
of gaps, up and down, and many of discount in the premarket and for the Investors exposed to market direc-
these gaps will present the opportun- open can occur, and again, gap fills tion were impacted negatively as
ity for retracements—what we call soon as the markets reopened and
“gap fills.” for the next four days afterwards.
There is also incredible opportunity We know historically The S&P 500 index was down −16%
for utilizing relationships in stocks that much of the YTD prior to 9/11 and then lost an-
and sectors. We can thereby use ETFs market’s gains during other −11.6% right afterwards before
as vehicles to capture profits and to bull market cycles occur turning around in a sharp rally. My
use on risk-on or risk-off days, as well office full of professional traders
in the overnight gaps.
as for strategic hedging. and I were there with our statistical
There are various type of gaps to (pairs) and risk arbitrage (mergers)
be aware of so that you can respond are often the intraday experience for portfolios. With hundreds of equity
with best practices. This will help those with the granular trading plans pairs on, and using leverage also,
you approach the opportunities that intraday requires. we had first-hand evidence of how
significantly prepared, since you resilient relationship-based trading
won’t always be successful. Catalyst-driven events and relation- was to market moves, and it still is
ship-based pairs trading to this day.
Gap fills during the day session Apart from flat opens and minimal Not all catalysts are bad for the
may be an opportunity for intraday gaps, which we consider the “noise” market in the way investors or traders
traders side of the business, there are might think. Hurricane Katrina was
Small gaps from the previous day ses- catalyst-driven events. The outcome a massive disaster to many lives and
sion’s close to the next day’s open of for US markets can be direct or “in caused a large area of destruction, but
less than 0.35% are mostly day-to-day sympathy” to other countries’ news the market did not go down. In fact,
noise and should be approached simi- or events. Historical examples of this there was a +3% rally in the week or
larly to the way you approach a flat type of sympathy could be seen with two that followed. Why? Most likely
open. We know historically that much the bombings in a London, England because natural disasters cause an
increase of GDP, and robust GDP
is bullish.
Technical gaps may not be imme-

diately filled
There is a difference between a
surprise catalyst and something
that changes sentiment like a dis-
appointment. When the market is
expecting the Fed to be dovish and
then discovers that they are staying
more hawkish, this disappointment
usually causes a down move that day,
and then the next day we may have a
follow-through gap. That is not the
type of gap I would expect to retrace
TRADINGVIEW
and wouldn’t expect the gap to be
filled immediately. The market needs
FIGURE 1: CONSUMER STAPLES (DEFENSIVE) VS. CONSUMER DISCRETIONARY (CYCLICAL).
to have its temper tantrum and then This shows a one-minute ratio chart of XLP versus XLY for December 13, 2022.
needs to work it out, usually dropping
down to test a support level. So we
might experience a technical gap as a
significant support or resistance level
is broken. This could be a moving
average or trendline break rather than
price points like matching highs or
lows. If the market has been up seven
days in a row and has its first gap
down day, I wouldn’t be so quick to
assume it has to fill the gap.
Using sector relationships for trad-

ing gaps in spread prices
As I’ve discussed before, I use a sta-
tistical database (called StockOdds)
to find odds and average performance
metrics on streaks, Bollinger Bands,
and many other price-based and FIGURE 2: UTILITIES (DEFENSIVE) VS. TECHNOLOGY (RISK-ON). This shows a one-minute
performance-based indicators. This ratio chart of XLU versus XLK for December 13, 2022.
resource comes in handy for assessing
the opportunity and expectation for On December 13, 2022, CPI data as follows: If the first symbol is
the time periods of your choice as well was released that caused a significant outperforming the second symbol, the
as the risk-adjusted returns connected gap up in the SPY. The S&P 500 is spread chart will show a rising spread
to those potential trades. comprised of 11 sectors, each with a price. If the first symbol is declining
corresponding Select Sector SPDR relative to the second symbol, the
ETF. Understanding what drives each spread chart will display a declining
Not all catalysts are sector individually and in relationship spread price. In this example, you can
bad for the market in to other sectors can assist traders to observe the discount of XLP relative
the way investors or capitalize on the day. to XLY at the open of trading on
traders might think. Figure 1 displays a ratio chart of December 13, which was a significant
XLP vs. XLY. A spread ratio works gap down in the spread price. Why?
XLY opened at a premium and even
though XLP opened up (a big move
in the market lifts most sectors),
XLY opened up more than XLP.
Why? Market participants really
wanted to put money to work in the
discretionary sector. It’s a chicken and
egg problem: Certain stocks move the
sector. The sector ETF drags along
certain stocks. Regardless of the mix
or mechanics of it, the behavior is
typical. Risk-on events contribute to
these moves regularly.
That is not the entire story though,
as the opening premium is caused by FIGURE 3: FINANCIALS (RISK-ON) VS. HEALTHCARE (DEFENSIVE). This shows a one-minute
ratio chart of XLF versus XLV for December 13, 2022.
those players that have to have it now/
can’t wait/don’t want to miss out.
A professional mindset is to pro-
vide liquidity and look for excess,
believing through a statistical ap-
proach in mean-reversion. Short XLY
and buy XLP.
Figure 2 is the same theme of
shorting XLK and buying XLU.
Because the market here is opening
up much more than the average
move and therefore at a significant
premium, the assumption is that we
want to sell that volatility, facilitate FIGURE 4: VANGUARD VALUE (DEFENSIVE) VS. VANGUARD GROWTH (RISK-ON). This shows
the speculators, but also hedge with a one-minute ratio chart of VTV versus VUG for December 13, 2022.
defensive positions that will hold
up better for two reasons: 1) they ratio spread. XLF opened up more ETFs. VTV represents value and
were not expected to open up as than XLV, which is healthcare and VUG represents growth. What did
much percentage-wise (you may again a bit more defensive. There market participants want on this
even get premarket trades on ARCA is one more thing at play here: If morning? Growth and growth at all
displaying the levels that they are at), the market was gapping on news costs, again willing to pay anything
and 2) when the market pulls back, the that impacted bonds (bonds and to have it. I say “sold.”
defensive positions are more resilient interest rates were the drivers),
to the downside. then those instruments will impact Using spread trading on large gap
Figure 3 is reversed in that XLF is XLF. Both factors—the market’s days
the one that moves better on risk-on sentiment change and interest rates Watch spreads for amazing insights,
days and is the first symbol in the adjusting—were at play the morning and better yet, trade these combina-
of December 13. The spread opened tions, especially on large gap days.
high, and you could have shorted XLF For down market gaps, you may have
A professional mindset and bought XLV. an opportunity to reverse the bias
is to provide liquidity indicated earlier.
and look for excess, Using thematic-based relation- Good success, and send me your
believing through a ships for trading gaps in spread questions or experiences!
statistical approach in prices
mean-reversion. Figure 4 moves us outside of the
sector ETFs into style and thematic
37 Years in the Making
metastock.com/whats-new
This is neither a solicitation to buy or sell any type of financial instruments, nor intended as investment recommendations. All investment trading involves multiple substantial risks
of monetary loss. Don’t trade with money you can’t afford to lose. Trading is not suitable for everyone. Past performance, whether indicated by actual or hypothetical results or
testimonials are no guarantee of future performance or success. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES
SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS OR TESTIMONIALS AND THE
ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. Furthermore, all internal and external computer and software systems are not fail-
safe. Have contingency plans in place for such occasions. MetaStock assumes no responsibility for errors, inaccuracies, or omissions in these materials, nor shall it be liable for any
special, indirect, incidental, or consequential damages, including without limitation losses, lost revenue, or lost profits, that may result from reliance upon the information presented.

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THE TRADERS’ MAGAZINE SINCE 1982 www.traders.

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Is it a common price pattern?

February 2023 • Technical Analysis of Stocks & Commodities • 19

if mybar >= mystartbar and mybar <= myendbar and

a. we are inside the trading time window

Note that we don’t apply a stop-loss because we want

The metrics shown in the tables in Figure 3 contain data

Let’s go further: Are

a. Yesterday, when the OB was

Tests on historical data can provide

For case (a), we’ll introduce the new

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On-balance volume OBV looks smoother than the price trend.

FIGURE 2: OBV TREND TRADING SYSTEM WITH AND WITHOUT PRICE

age calculation periods (Figure 4). This does not cover

Applying the minimum filter to

26 • February 2023 • Technical Analysis of Stocks & Commodities

// calculate moving average from array If printfiles then begin

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Low[0] <= Low[1]

where [0] denotes the current bar and

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