The Educated Analyst Nov-Dec 2009

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A Free Technical Analysis E – Magazine for Traders of Financial Markets




Inside this issue...

How to use Fibonacci to

determine the next major crash in

the market.

Using Gann's Geometric work

to see in advance where the market

will bounce.

What happens when you mix

the humble Gann Fan with the


The results will shock you

And much more.

Volume 1, Issue 2 NOV / DEC 2009


The Educated Analyst | NOV /DEC 2009


NOV/ DEC 2009 - VOLUME 1 Issue 2




Bennett McDowell from looks at the human need that traders have to forecast markets, and implements some ground rules that allow this need to become an important tool when combined with observing market realities.



The first of two articles in this issue that contemplates a potential depression. Alan Oliver uses his easy to understand style to explain the Gann numbers of 90 & 144 and how they apply to future market action, and what markers have occurred and need to occur to confirm his beliefs.




Marcus Addison from Belmont securities examines some of the studies from Australia and the US on Buy-Write strategies. By observing their success over bull, bear and sideways markets, Marcus is able to answer a couple of big questions. Are Buy-Write strategies worthwhile? If so, who best suits them.




Jeffery Tie looks at the Sequential Exhaustion Indicator developed by world renown author Thomas Demark, and takes us through a step by step process of how the tool was developed. With a better understanding of the tool, we are in a position to see its place in our trading strategy.




What does it take to become a full time trader? In the first of a 2 part article series, Dale Gillham from Wealth Within uses his years of experience to give some practical advice to those looking at trading full time.



Market Analyst’s Managing Director Mathew Verdouw examines the Gann Square Top and Bottom tool and looks at how he uses the lines they produce as support and resistance lines to create trades from.




Ingela Troha from Unearthed Financial takes a look at the latest craze of trading robots and examines whether they have any real role for professional traders.



Best Professional Practice Part 1. In this article, master coach Chris Shea details his Best Professional Practice theory, explaining the critical areas in traders that need to be addressed in order for success to follow.




Michael Parsons shows the potential that the Bar Split and Doji patterns have with short term trading strategies when coupled with the right confirmation.



In this article Peter Varcoe gives us part 2 of his series of articles on trading patterns. Peter concludes his discussion on Double Tops and Double Bottoms and then gives us some clear insights into the Head & Shoulder patterns.



Well known Italian trader Mariano La Rosa provides a deep insight into the not so commonly understood uses of the Gann Fan Angles.



The Educated Analyst | NOV /DEC 2009 i and welcome to the second edition of ‘The Educated Analyst’. We have been thrilled with the feedback surrounding our first edition and we are so glad to hear that the articles are helping traders in their analysis and trading.

There has been a lot of talk about the Green Shoots of a recovery taking hold in the media. Is it really Green Shoots or is this a "suckers rally”? Only the next few months will tell if we really are on the road to recovery or if this was just a reprieve. Either way, when you are involved in the markets and trading with Technical Analysis,

prosper no matter which way the market goes. I always enjoy reading about cycle analysis, like the long term cycles that planetary analysis can bring. In Dr Mariano La Rosa's article this month you will see how the "far out" (literally) can provide us with vital indications into where the market is going.

Last Month Chris Shea wrote "Successful traders have the discipline to remain focussed... despite the events occurring outside their control...". I love this, I think it is a mantra that every trader should say ten times a day. Technical Analysts are in the box seat to be very successful over the next cycle so long as they are committed to education and discipline, we just have to believe it despite the noise coming from the media.

Inside this issue you will also find some information on the Emergency Relief that ACC World Relief is doing in Samoa. This is a cause that both Educated Analyst and Market Analyst are supporting and would ask that you take a few moments to consider the plight of our neighbours and if there is anything that you can do to help. Anyway, enough from me, I trust that you enjoy this edition of ‘The Educated Analyst’ and the articles are of assistance to you. Remember that all the experts that contribute to The ‘Educated Analyst’ are available if you would like to further your Trading Education, their contact details are at the end of their articles.

All the best!

Mathew Verdouw Editor

The Educated Analyst



NOV / DEC 2009 - VOLUME 1 Issue 2

the reality is that it does not matter. As long as there is volatility, we can make money from our trades.

In this month’s issue of ‘The Educated Analyst’ we have an article by Alan Oliver providing a long term look at where the market could go using Fibonacci, and while it may not be pretty, it is a valuable insight that can equip us to





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TheEducated Analyst | 5 Blending Market Realities with Forecasts NOV /DEC 2009 Many trading systems and just about all opinions of

market direction attempt to forecast the market. Whether one uses fundamental or technical analysis, if an opinion is being generated, you are attempting to forecast the market. Some use Elliot Wave theory, some rely on P/E ratios but the overall purpose is to estimate where prices will be at some point in the future. As traders and human beings we will always have opinions and ideas based on our beliefs about what we have experienced. No matter how hard we try not to have opinions, we just can’t seem to help having them. How we use these opinions, forecasts, and beliefs is important. Where the markets are concerned, the first thing to realise is that all the opinions or forecasts about the markets are nothing more than fantasies. At the moment a forecast is formed, its reality doesn’t exist. With this said, do we want to just trade fantasies? Obviously not! Then how can we use forecasts to help is in trading, instead of hurting us? These are important questions. Here are some examples and analogies of how forecasts can help or hurt us.

Example One: Let’s say you believe the forecast generated by an Elliott Wave theory indicating that the stock XYZ is about to begin a trend up. Even the MACD is indicating positive divergence. You say to yourself, “A no-brainer, I’ll buy here and wait”. Another week goes by and instead of beginning its up-trend, XYZ stock goes lower. You say to yourself, “I entered this trade too early. But I BELIEVE it will head up very soon”, so you hold on another week.

Next week the stock goes lower, and now you are worried. The MACD bullish divergence is still present and the Elliott Wave forecast remains the same, but it is heading down for the last time, a shake out. You think yourself, “Can’t go much lower”. The next day the stock plummets, you panic and sell out your position and scratch your head saying, “How could that happen”? It happens all the time to traders relying on the forecast and not the actual market!

In this example, the trader held on to his fantasy based on his forecast. His faith in the forecast leads him to avoid using a stop-loss. This is typical for traders locked into this type of forecast trading. After all, their ego is involved here, too.

Let’s take the same example and show how to use the forecast tour advantage. Instead of just buying the stock outright based on its positive forecast, we wait until the stock shows signs of actually reversing its trend down. We feel based in our forecast that this stick will turn around soon, but the current reality indicates that it is not happening now.

By not purchasing the stock and waiting for the price of the stock to show signs of actual strength, we are trading the realities of the market and not the forecast. However, we are using the forecast to get ready and to keep this stock in our lists of possibilities.

Look at forecasts to help round out your trading. It is another trading tool you can use. Use the following analogy as a way to think of forecasts. Let’s say you are planning a sailing trip for the day, you check the weather forecasts and it is not good with heavy rain and wind expected. You have a great boat, you’re an experienced sailor, so off you go. As you leave the dock, the weather is perfect. It is sunny with light winds. Now I ask you, even though the forecast is for very heavy rain and heavy winds, would you wear your rain gear now or wait till the conditions change? I think most of us would wait until the conditions actually change. You would also set the sails of the boat to the current weather conditions and winds and not the forecasted conditions which may or may not even happen. If you put up a small storm sail now, you will not be able to sail the boat in the current light air conditions. As the weather conditions change, you change along with the weather!

The sailor in this example would use the forecast to be PREPARED for a possibility of bad weather by bringing rain gear and the proper sails and crew. It is the same




TheEducated Analyst | 6 Blending Market Realities with Forecasts NOV /DEC 2009 with trading! Whatever the forecast is, take note but

trade with the current conditions and be ready if conditions change. In other words, trade the realities of the market, not the forecast! Or maybe another way of looking at this is to “Live In The Present And Not The Future Or The Past!

When trading the “Realities” of the market, it is also important to trade within the “Realities” of your risk capital. Implementing sound money management encompasses many techniques and skills intertwined by the trader’s judgment. All three of these ingredients must be in place before implement a good money management program along with their trading. Failure to implement a good money management program will leave the trader subject to the deadly “risk-of-ruin” exposure leading eventually to a probable equity bust. Whenever I hear of a trade making a huge killing in the market on a relatively small or average trading account in a short period of time, I know the trader was most likely not implementing sound money management. In cases such as this, the trader more than likely exposed themselves to obscene risk because of an abnormally high “Trade Size”. In this case, the trader or gambler may have gotten lucky, leading to a profit windfall. If this trader continues trading in this manner, probabilities indicate that it is just a matter of time before huge losses dwarf the wins, and/or eventually lead to a probable equity bust or total loss.

Whenever I hear of a trader trading the same number of shares or contracts on every trade, I know that this trader is not calculating their maximum “Trade Size.” If they were, then the “Trade Size” would change from time to time when trading.

In order to implement a money management program to help reduce your risk exposure, you must first believe that you need to implement this sort of program. Usually this belief comes after having a few large losses that cause enough psychological pain that you want and

need to change. You need to understand how improper “Trade Size” actually will hurt your trading.

Novice traders tend to focus on the trade outcome as only winning and therefore do not think about risk. Professional traders focus on the risk, and take the trade based on a favourable outcome. Thus, the psychology behind “Trade Size” begins when you believe and acknowledge that each trade’s outcome is unknown when entering the trade. Believing this makes you ask yourself, “How much can I afford to lose on this trade and not fall prey to the “risk-of-ruin” outcome”?

When traders ask themselves that, they will then either adjust their “Trade Size” or tighten their stop-loss before entering the trade. In most situations, the best method is to adjust your “Trade Size” and set your stop-loss based on market dynamics like we teach here in “Applied Reality Trading”.

During “draw-down” periods, risk control becomes very important and since good traders test their trading systems, they have a good idea of the probabilities of how many consecutive losses in a row can occur. Taking this information into account allows the trader to further determine the appropriate risk percentage to take on each trade.

Most trading systems use a “Moving Average” to base trading decisions, especially trade exits. “Moving Averages” are usually derivatives of price and therefore do not represent the natural “Truth” of the market. Furthermore, “Man-Made” derived moving averages can be adjusted with variables such as simple vs. compounded, and are subject to alterations based on opinions and prone to subjectivity. Thus, I do not recommend using them as primary entry and exit signals because they do not represent the true realities of the market. Instead use an objective based trading approach to tell me when to exit the market! In addition, most trading systems that use moving averages to exit trades tend to “whip-saw” the trader in and out of trades too often!


TheEducated Analyst | 7 Blending Market Realities with Forecasts NOV /DEC 2009 Below is a chart illustrating how we can use a

“Reality-Based” trading system to trade the Reality of the market. When analysing the chart, notice how the triangular shapes on the chart called “Pyramid Trading Points” capture the “Reality” of the market as it is unfolding. Both trade entries and exits are set based on the price activity and not arbitrarily set by the trader. This is important because we want to enter and exit the market based on market reasons or “Market Truths”.

This is a chart of the E-Mini (ES H4 contract) on a one-minute intraday time frame.

So, while it is fine to have an opinion as to market direction, it is best to base your trade entry and exit decisions on “Market Truths”. Trade the realities of the market as the market unfolds and see if dealing with reality delivers a better result!

About Bennett McDowell

Bennet McDowell is founder and president of® and created the Applied Reality Trading® system traded throughout the world. He lectures and speaks at many Trading Expos and writes for several magazines. His new book “The ART® of Trading” published by Wiley & Sons is a best seller.

Bennett McDowell can be contacted through his website


TheEducated Analyst| 9 2019: The Next Great Depression NOV/DEC 2009

It’s a scary headline and one that can cause some dilemma amongst market traders. It’s not a pleasant thought to contemplate when the current market situation seems daunting, considering the possibilities that things could get a lot worse. And, as this article should show, the cycle of depressions is nearing a climax where the astute trader must accept the possibility of a financial disaster and prepare for it.

Firstly, let’s look at the last great depression: The last Great Depression occurred in 1929 when, mainly due to government mismanagement of the economy, unemployment ran to 25% whilst those who had jobs had their wages cut by up to 40%. The Great depression was not caused by the stock market; it primarily began as a result of the demand for gold as some countries adopted floating currency valuations after World War 1, whilst others stayed with the gold standard. The US held around 40% of the gold reserves and as other countries devalued their currencies, the amount of gold leaving the US caused the Fed to raise interest rates. The rate it charged on loans to member banks would stem the outflow of American gold

and dampen the booming stock market. As a result, the United States began to receive more shipments of gold. By 1929, as countries around the world lost gold to France and the United States, other countries’ governments initiated deflationary policies to stem their gold outflows and remain on the gold standard. These deflationary policies were designed to restrict economic activity and reduce price levels, and that is exactly what they

did. Thus began the worldwide Great Depression.

I have studied the great depth of material left behind by W.D.Gann, and his work is still as relevant and necessary today as it was in his time. Gann developed a theory of market timing and cycles, and as such he was able to predict market turns months and years in advance. To explain this in one article is certainly impossible, but if we take a look at the core essence of this work we will see how the time frame of 2019 is potentially a financial disaster for the whole world.

Gann discovered many tools and techniques, but for today we will look at just two: the number 144 and the number 90.

The number 144 is a Fibonacci number, a series of mathematical numbers and ratios used in nature for the design and construction of all things. Indeed, Gann did earlier refer to the discovery of 144 in markets as his greatest discovery. Let’s look at a few examples of 144 in markets:




With Alan Oliver


TheEducated Analyst| 10 2019: The Next Great Depression NOV/DEC 2009

In the Australian top 200 stock listing is a company called Amcor, a world leader in cardboard packaging. Here we see a high March 21, 2006 at $7.74. Exactly 144 trading days later the next major top formed October 16, 2006 and prices suddenly reversed. Or maybe it was also the fact that from the previously low Aug 16 at $6.15 the market had risen $1.44 or 144 cents to make a high at $7.59 on October 16, 2006.

So this October 16 date was crucial to Gann traders because it was 144 days from a previous top and 144 cents above the prior low.

These types of counts abound in the markets if the trader knows to look for them. Another fabulous example is Rio, a huge mining company once sought by BHP in a merger deal.

This stock made a major top May 19, 2008 at the height of the merger rumours, only to fall just as dramatically when the merger was abandoned. The stock fell from $124 to $23 in Dec 5, 2008 where it began to recover, some 143 trading days from the May 19 top. Another example, from the Dec 5thlow the market rallied to a minor low July 7,

some 144 days later where a rapid rally drove prices from $46 to $64 in less than 30 days.

As I mentioned, there are far too many examples of 144 in the markets, but similarly the number 90 is also as frequent and reliable as a market indicator.

The FTSE 100, the UK stock market index, shows a fabulous example of this number at work.

The FTSE made a major top June 2007 as the Global Financial crisis emerged, and 90 weeks later it made a major low.


TheEducated Analyst| 11 2019: The Next Great Depression NOV/DEC 2009

The number 90 in numerology means change, redirection or obstacle. Have a look at the change or redirection in the Australian dollar/US dollar currency chart, 90 months from the major low at47 US cents in April 2001 brings us to October 2008, where the Australian dollar bottomed out at 60 US cents and at time of writing is now nearly 87 cents.

So, how does this give us 2019 as a depression target? Using another of Gann’s famous discoveries, the 50% rule is a major factor. Gann recognised that half way between a high and a low is a very important juncture where markets can reverse, and I have seen this aspect literally thousands of times. Most street wise traders look for the half way point and prepare to start a trade once the market confirms a reaction at this point.

The last Great Depression occurred in 1929.

If we add 90 years, the great Gann discovery, we end up with 2019 as a market reversal. Interestingly, the previous depression occurred in 1840, nearly 90 years to the 1929 depression. If we accept the 50% theory in a time line and 1929 to 2019 is 90 years, then 50% of 90 being 45 years means we would have a marker in time at 1974. In 1974 the world experienced a severe recession, where banks failed spectacularly in the UK due to house

Source: Market Analyst 6 (


TheEducated Analyst| 12 2019: The Next Great Depression NOV/DEC 2009

prices falling dramatically.

If we then use our target of 144 months (or 12 years) before 2019, we have 2007 as a marker…the start of the Global financial crisis!

The final test will come 90 months before 2019, lets say October 2019 as the Depression date. 90 months prior to this will be the first quarter of 2012. If this is a marker in time where an event, say a severe pullback like Sept 11 2001 or the like occurs, it will leave me in no doubt that 2019 is very likely to be a world economic disaster unparalleled in human history.

In reality, this is simply a forecast that may or may not eventuate. However, forewarned is forearmed and in my opinion forecasts are dates to watch. Having been forewarned we can make the most of a bad situation. I suspect that we really have probably around 5 years to get our respective houses in order before the subtle signs emerge of what is to come, and sadly many will suffer extreme consequences if this forecast does eventuate.

I hope this article is of some value to you, and in saying that I am not trying to frighten you into action, I am suggesting you make a plan for an event that has the very real possibility of complete financial Armageddon for those who bury their heads in the sand.

I wish you every success, Alan Oliver.

About Alan Oliver

Alan Oliver is a full time trader and private educator. Early in Alan’s career he worked for two major Australian banks where his interest in the markets began. After developing and successfully honing the skills of a full time trader, Alan left the workforce to trade full time which is what he has been doing ever since. Most recently Alan has written a book on his favourite subject of Fibonacci and the Golden Harmonic ratio. Alan has travelled extensively, been invited as a key speaker to many countries including: Australia, Hong Kong, Malaysia, Singapore, Thailand and China.

Alan also runs a web site (named after his book) to assist traders


TheEducated Analyst| 13 The Pros and Cons of Buy-Write Strategies NOV/DEC 2009

Buy-Write (or covered call) strategies are nothing new to investing. However, it seems that only in the last decade have genuine studies emerged to test their strengths. Most of these have covered

markets from the late 1980’s until the present day, representing bull, bear and sideways markets. The hypotheses of these studies have been to see whether superior returns from Buy-Write strategies can be achieved with less risk than just trading shares alone. But as with most studies they all have theoretical assumptions that leave the investor asking “Can I rely on this information?”.

Fortunately, in 2002 the CBOE and Standard & Poor got together to create a buy-write index (BXM Index) to test the theory going forward with the S&P 500.

It seems these studies have some merit. Since 2002 we’ve experienced both bull and bear markets to further test the hypotheses and the results closely match the theory. Is it good or bad news for Buy-Write strategies? We’ll get to that soon…

Firstly, what is a Buy-Write Strategy?

A Buy-Write strategy is when an investor buys a single stock or a portfolio of stocks and couples this by writing a call option or an index option that covers the portfolio. A single stock example would involve buying 1000 NAB shares, then writing (or selling) 1 call option. (This assumes an option ratio of 1000:1)

For a portfolio of shares (ideally shares that represent all sectors of the index) you would write an index option that equals the total value of your shares. In the Australian market, if your basket of shares equals $100K,

then you would write 2 S&P 200 Index call options (assuming the S&P 200 Index is at 5000).

What are the potential benefits and consequences? One instant benefit is that when you write an option you receive a type of income called a premium. The premium varies based on how far above the market price your chosen strike is and a combination of factors such as volatility and time to expiration. Most investors use this as a buffer on the downside or a way of generating an income during sideways markets.

One consequence is that if the stock price is above your option’s strike price at expiry, you are forced to sell the stock at the strike price level. Is this a bad thing? It is if the price moves well beyond the strike price. Remember, you’ve still earned the premium and the move up to the strike price, so effectively you haven’t done too badly. Basically you are forgoing blue sky potential on a month to month basis in exchange for a more consistent investment return during a bull market and higher returns in a flat or downwards market.



TheEducated Analyst| 14 The Pros and Cons of Buy-Write Strategies NOV/DEC 2009

Another consequence is that when your portfolio of stock takes a downward hit, so does your Buy-Write portfolio. However the advantage of the Buy-Write has the buffer of the premium that you’ve earned as the market moves down.

So what do the studies suggest?

Interestingly, the studies conducted over the S&P 500 index (namely Callan (2006), Ibbotson (2004) and Whaley (2002)) almost mirror the Australian studies over the S&P 200 (by University of

Technology, Sydney (2004) and SIRCA (2004)). Essentially, the main studies agree on a few points.

1. In a strong bull market, a Buy-Write strategy will perform with positive results, less standard deviation but less profit than a basket of shares. 2. In a sideways market, the same strategy will

outperform a basket of shares with less risk. 3. In a bear market, the strategy will lose less than

a basket of shares due to the buffer of premium earned.

4. Overall, a Buy-Write strategy enhances the overall and average returns of the portfolio, reduces the standard deviation (risk) and thus improves the risk-adjusted returns as well.

As an added edge, Whaley argues that Index put options are over-priced because of their large demand from fund managers. This in turn pushes call option pricing up (due to the put-call parity relationship). This simply means you receive more premium just because fund managers need insurance.

BXM vs S&P500

*Please note that both the BXM Index and the S&P Index were adjusted to 100 for comparison.

THE BIG QUESTION: Who best suits a Buy-Write Strategy?

An analogy of two personality types may best illustrate the answer… stay with me on this!

Let’s imagine two alpine skiers, husband and wife, Brad and Angelina. They’ve reached the top of the mountain and being the competitive couple that they are, they challenge each other to a race to the café at the bottom. They agree that either can choose any route they wish and they haggle to decide that the winner receives a coffee and bragging rights. Big stakes!

They both equally know the terrain and are evenly matched.


TheEducated Analyst| 15 The Pros and Cons of Buy-Write Strategies NOV/DEC 2009

Brad loves the thrill of moguls, jumps and steep inclines, while Angelina prefers the smooth, fast runs with the wind through her hair and enjoying the view.

They start on three… Brad heads straight down a mogul run, teeth grit with determination. He’s twisting and turning, on some bumps he’s even yelling. And the noise is not lost on several beginners looking down from a chairlift, who mention that they’d like to ski like him one day. He seems to be using a lot of energy, but he’s having a blast, he’s living on the edge.

Angelina takes the longer, smoother run with equal determination, passing directly underneath the beginners who don’t notice her. There are a few bumps on her chosen route but she seems prepared, taking them in her stride, then continuing on at speed glancing up at the blue skies and thin white clouds stretching out above her.

She also notices Brad in the corner of her eye overtaking her as he hits a smooth stretch of snow before slowing down to prepare himself for another patch of moguls. Brad doesn’t notice her. He’s busy twisting and turning again.

Angelina is well ahead when she notices that part of her chosen route is closed due to an avalanche, and is forced to join Brad’s course for a short part of the way. She is less proficient at jumps and bumps but successfully manages her way with caution. Meanwhile she can hear Brad’s yelling and screaming behind her. He’s now hitting massive airs and taking bigger risks, sometimes coming unstuck but somehow always coming back to his feet. This is his forté and he easily passes his wife without even noticing her.

Nearing the café now, they once again choose different paths. Predictably, Angelina takes the smoother and longer home trail while Brad has one more go at the jumps.

With the bumps behind her Angelina feels exhilarated as she breathes in clean fresh air. She’s stopped looking for Brad and has stopped worrying about winning or losing. Brad hasn’t and his shins are bruising as he hits the next jump. He skies it and looks good but lands on ice and spins out of control, disappearing into a snow storm of his own making before reappearing with both skis still on, snow all through his suit and a few more cuts and grazes. He continues on using his last strength reserves. Somehow Brad scrapes in ahead of Angelina, grabbing the railing of the cafe with his uninjured hand to signal victory. He clicks out of his skis and walks inside without talking. Angelina happily buys him the coffee. He tries not to wince as the hot liquid reminds him of his cut lip. For some reason the bragging doesn’t start and Angelina is pretty sure it probably won’t any time soon.

How is this even remotely relevant?

In the world of investing, Brad is the stock market, pure and simple, and Angelina represents a Buy-Write Strategy.

Brad’s course is bumpy, noisy and sometimes dangerous. Angelina’s has some bumps but is smoother and more fruitful in many ways. I allowed Brad to win the event because sometimes the stock market will outperform the Buy-Write Strategy. (Actually, according to SIRCA (2004) the Buy-Write strategy returned better 52 out of 60 months). But you would hazard a guess that Brad’s not ready for a re-run today, and yet Angelina would happily run her course again.

You may also have realised that hardly anyone noticed Angelina, even her husband! She stuck to her plan, kept relatively quiet and took in the benefits of the great outdoors along the way, only to finish slightly less than par to Brad. There were less highs and less close shaves


TheEducated Analyst| 16 The Pros and Cons of Buy-Write Strategies NOV/DEC 2009

along her way and she was aware enough to compare her progress to Brad’s, much like a Buy-Write strategy.

Things to remember

Financial markets are volatile, with movements attributable to both company and market fundamentals, and the emotions of participants. Traders and investors are prone to optimism and pessimism and while these sentiments can add to market volatility, it also creates opportunities for patient, disciplined investors to profit from these movements.

Also in my experience, everybody loves to receive a dividend. Isn’t it even better to receive additional dividends in the form of option premiums.

The goal of a Buy-Write strategy is not only to reduce risk (or smooth your equity curve), but also to outperform the relevant index. The main studies referred to have trialled a cut-and-dry method of comparing the Buy-Write to the respective index. Obviously you can further enhance your returns by picking the right stocks.

Furthermore, you can actually choose the amount of premium you receive (also known as yield). However, the greater the premium, the more likely that the market will trade through your strike price, so a balanced approach is needed in choosing which call options to sell.

What next?

There’s no doubt this type of strategy is not for everyone. Furthermore, it’s not the only way to invest for growth. But, in answer to the question, ‘who best suits a Buy-Write strategy?’ it really depends on whether you prefer the bumps or a smooth ride, whether you like the thrills or a calmer journey and whether you like the

market noise or the quiet. I suppose it’s whether you prefer Brad, or you prefer Angelina. If you are leaning towards the latter, then further reading into Buy-Write strategies would certainly be time well spent.

About Marcus Addison

Marcus Addison is an Advisor at Bellmont Securities in Sydney. His life of trading started over 12 years ago with a personal account in futures, then moved to day-trading Bond futures for the largest electronic market maker worldwide. He then took to a boutique hedge fund as Portfolio Manager, trading international equities, commodities and spot FX For more information visit


The Educated Analyst | 17 Introduction to the Sequential Exhaustion Indicator

NOV /DEC 2009 In this article I want to examine the design of an

indicator called the Sequential Exhaustion.

The Sequential Exhaustion Indicator is based on the methodology of Thomas Demark. Thomas Demark is considered to be one of the great market technicians of the world. A trader for over 38 years, Thomas Demark has authored three books which have all become trading classics, the Sequential

Exhaustion Indicator is described in detail in “The New Science of Technical Analysis”. Demark’s favourite quote is that “the trend

is your friend unless it is about to change”.

The Sequential Indicator was created by Demark in the mid 70’s before charting software was available to traders. The purpose of its design was to help him locate high

probability zones where the prevailing trend was likely to end.

There are two key components that make up the Sequential Exhaustion indicator. As the tool is trying to identify the exhaustion of a trend, there must firstly be a trend before there can be any exhaustion of this trend. Therefore the first component of the Sequential Exhaustion Indicator is that it has a trend identification method, and once the trend is identified, the exhaustion process can then initiated.

Trend Identification Method

The simplest way to explain how the Demark trend is defined is to use a one period simple moving average of the close, and then offset this moving average by four bars (move the Moving Average four bars to the right). See image.

Notice that when the market is trading in a sideways motion, the bars can jump above and then below this offset one period Moving Average within a very short period of time, without any sustained momentum. For the purpose of trend identification, a close above the offset one period Moving Average will be considered as a positive bar, and a close below will be considered as a negative bar. Trends can only start if the market makes a sustained consecutive nine bar move above or below this offset one period Moving Average. This trend identification process is always an ongoing process.



Source: Market Analyst 6 ( With Jeffery Tie


The Educated Analyst | 18 Introduction to the Sequential Exhaustion Indicator

NOV /DEC 2009

The Exhaustion Countdown process

Once a trend has been indentified, the numbers one through to nine will be labelled as red trend numbers by Market Analyst. In the above example, the close of all of the bars

are below the offset one period Moving Average. This is obviously signalling a bearish move.

With the trend identified, the market is then expected to continue in the trend, until the sellers are exhausted. That is the zone where the existing trend can end, and a new trend in the opposite direction can

start. The process to identify this exhaustion zone is known as the Exhaustion Countdown Process. Here are the rules:

1. The Countdown process can only start from trend candle 9. 2. The Countdown candle must close beyond the look-back of 2 candles (Lower for a bearish market, higher for a bullish market). The Countdown process

is the second

component of the Sequential Exhaustion Indicator. In this case, the close of trend bar nine is lower than the low of look-back 2 bars, and therefore this bar is the first countdown bar in the exhaustion zone. Market Analyst will display countdown bar as black numbers.

Source: Market Analyst 6 (


The Educated Analyst | 19 Introduction to the Sequential Exhaustion Indicator

NOV /DEC 2009 Note that countdown bars may not occur continuously, as the market may go into minor corrections and therefore delay the exhaustion. The Countdown continues only if the rule for the countdown is met.

The close of countdown bar number eight has special significance, as this level provides an additional filter rule that will define the final exhaustion bar. Market Analyst will remember the close of Countdown bar 8 and will apply the rule at the exhaustion countdown bar. This is being described below.

Source: Market Analyst 6 (


The Educated Analyst | 20 Introduction to the Sequential Exhaustion Indicator

NOV /DEC 2009 Notice that Market Analyst will colour code exhaustion bars 10, 11 and 12 in blue. This means that the countdown process is now deemed to be approaching an exhaustion zone.

The final exhaustion bar is countdown 13. The rule is that countdown 13 must be beyond the close of Countdown 8. In a downtrend as in our example, countdown 13 must not only be a valid countdown candle, but must also be below the close of Countdown 8. If this requirement is not met, Market Analyst will notate any countdown candle after countdown 12 as a +. This means that although the candle is a valid countdown, it is not the Exhaustion Countdown 13. In the current example, the next countdown candle met the exhaustion rule, and is then labelled as countdown 13, also in blue.

Once countdown 13 appears, the market is deemed to have reach a level whereby the sellers are exhausted, and the new bullish trend can soon start.

Source: Market Analyst 6 (


The Educated Analyst | 21 Introduction to the Sequential Exhaustion Indicator

NOV /DEC 2009 Above example shows the delay of the Exhaustion Countdown 13


The Educated Analyst | 22 Introduction to the Sequential Exhaustion Indicator

NOV /DEC 2009 The above chart shows two exhaustion zones that

correctly anticipated the lows in the EUR/USD.

There are further complexities in understanding and using the Sequential Exhaustion Indicator. There are also some books and authors who have done a fine job in the interpretation of Demark’s methods. It would be advantageous to do further research for yourself on this tool and Demark’s methods, as this is just an introduction to the Sequential Exhaustion Indicator. However I hope that by providing you with an insight into how the tool was designed, you can see the potential usefulness that this tool could have for you. I have used this tool with great success over many years in my own trading, and teach this tool as part of an overall trading strategy for my students.

About Jeffery Tie

With more than 25 years of experience in financial markets, Jeffery's stock market career began in 1977 with JM Sassoon and continued with Kim Eng Securities. During his time in Stock-broking, Jeffery witnessed many cycles of boom and bust, including the 1987 meltdown in worldwide equity markets.

In 1997, Jeffery joined Refco Singapore. During this time he developed new expertise in International Futures Markets and FX.

Jeffery's experience and training during his time at both Stock Broking and Futures Broking enhanced his understanding of Technical Analysis and Trading. This expertise was enhanced by his association and friendship with Ray Barros, a well known Fund Manager and Trading Coach. Jeffery's expertise in Technical Analysis was recognized by the Singapore Exchange who has invited Jeffery to its panel of Educators. Jeffery consistently gets very positive feedback from the attendees of his seminars and courses.

Jeffery is currently an independent consultant specializing in coaching and educating serious student-traders in the principles and concepts of trading from his base in Singapore.


The Educated Analyst | 23 So... You want to be a Full Time Share Trader? - Part One NOV /DEC 2009

News Flash: ‘Boom share market rise entices many to the share market in the hope of finding riches.’ A new share ownership study by the ASX claims 55% of adult Australians include shares as an asset class in their portfolio, an increase of 175% over the last 10 years. Those that have direct share ownership account for 23%, whilst the remaining 32% have a combination of direct and indirect (managed shares) or just indirect share holdings.

The bull market that has unfolded since March 2003 has seen the average individual make good returns, so much so that many are looking to leave work and trade the share market full time……….

Sound familiar! I have heard it all before; just prior to the tech wreck, the Asia crisis, the 1987 crash and the list goes on. Now we are nearing the end of 2009, the market has been bullish since March and the cycle is starting again. There is a saying that ‘we learn from our mistakes’, but if this is true, why then do people continually make the same mistakes believing it will be different this time?

Some time ago I received an all-too-familiar phone call from a gentleman who had been investing in the share market and had made some money. He told me he was going to take six months long service leave and trade options full time in an effort to become a full time trader, so he wouldn’t have to go back to work.

Other than reading a couple of books, he had no education in the share market and had simply made money in a very bullish market. So what do you think his chances will be of becoming a successful trader if he takes his long service leave now and does nothing more to educate himself? Statistically, anyone trading options has less than a 5% chance of being successful long term but that aside, even if he were to trade shares, what do you think his chances would be? At a best guess, I would say less than 50%; in fact if I was to be truly honest I believe it would be less than 30%.

I was chatting with a very experienced broker in Options, Futures and now CFDs just the other week and in his experience the majority of traders last between a few days and nine months before they end up broke, which is consistent with research from other brokers. So why is this? Quite simply, it is because of a lack of knowledge. If you want to become a full time trader you need to follow the ‘Be, Do, Have’ principle. You need to BE a full time trader, DO what a full time trader does and then you will HAVE what a full time trader has.

So how can you become a full time trader?

It takes at least two years for anyone to become a full time trader, if not longer. Knowledge is everything in the context of trading. The streets are littered with ‘would be traders’ and in a bull market many are profitable mainly through sheer luck rather than good knowledge. Strong bull markets tend to hide mistakes in judgment and lack of knowledge, which is why I say that unless you have been trading successfully for more than two years, you cannot consider yourself a trader.

To be a full time trader, you need to combine a high level of knowledge with experience; without this, your probability of success over the longer term is very low. When you leave work to trade full time, you no longer have the security of a regular income; therefore your attention is often directed to making profits from every trade to pay the bills.

This need for survival often results in the trader trying to trade more to make up for any trading losses or failure to meet their expected financial needs. A spiral of increased pressure begins, resulting in the trader taking higher risks to get back on top. Unfortunately, due to their lack of knowledge and experience, many end up back at work. Being a full time trader does not mean you work every day. It simply means that your trading is paying for your lifestyle. (This is a very important distinction and one I suggest you ponder if your goal is to trade full time.) If your goal is to replace your income


Part 1





The Educated Analyst | 24 So... You want to be a Full Time Share Trader? - Part One NOV /DEC 2009 of $100,000 per year, it does not mean you have to

make around $2,000 per week from trading. It just means your total trading profits over one year need to equate to $100,000. Looking at it like this rather than the micro view of generating $2,000 per week will make a dramatic difference to your psychology and how you trade the market.

Another very important point I want to make is that you should only subject yourself to the amount of risk you need to achieve your goal(s). For example, if you have $500,000 to invest and you need an income of $50,000 a year, you only need a return of 10%. Just by buying the top blue chip shares for the medium to longer term will more than deliver this income for you. If you only have $100,000 to invest and you still require $50,000 in income a year, you will need to generate a 50% return on your capital. Therefore, you will need to trade shares that assist you in producing this return or use leveraging in your trading plan.

If your goal is to become a full time trader, I highly recommend you prove to yourself that you can not only trade but make the sort of income you want from trading while still working.

In Part 2 of this article I will share with you key strategies that will enable you to transition to becoming a full time trader, if that is your goal.

About Dale Gilham

Dale Gillham, founder and chief analyst of Wealth Within successfully trades $10’s of millions on behalf of clients using his proven and audited investment strategy. His company also specialises in delivering Australia’s first and only nationally accredited Diploma and Advanced Diploma of Share Trading and Investment as well as the accredited Course in Contracts for Difference. For information about Wealth Within visit


The Educated Analyst | 25 Trading Between the Lines NOV /DEC 2009 One of the things that I love about Technical Analysis

and especially the analysis with Gann techniques is the “Oh Wow!” moments when you apply a tool and see the market treat the lines that you just added like an impenetrable barrier. How does that work??? Why is the market respecting a line that is a simple geometric calculation from a previous turn in the market? The how and why I think I’ll

leave for another time. What I aim to do in this article is to introduce you to one of the Gann tools that I use every day and reveal how I trade from it. Let me firstly say that I

believe that the field of Gann is one of those areas where you need to dedicate yourself to study. It’s not for everyone, but perhaps it’s my engineering background that makes me fascinated with the cyclic and repeatable nature of markets. I also truly believe that if you can master his techniques, then you will be able to be very successful as a trader.

One of the first things that I do once I open a chart is start looking for major highs and lows in the historical data that I have. The first chart I want to show you is Incitech Pivot (IPL) on the ASX. This stock first came on my radar after it suffered a 30% reduction in value in the space of a week. If you remember my article last issue

on the three dimensional sector map, you will know that this fits the bill of what I look for.

What I’ve done here is add the “Gann Square Top/Bottom” tool to the high just before IPL crashed in January 2009.

While at first glance it can be just a jumble of lines on the chart, what I am looking for is instances where the stock has “respected” the lines, and proof that this square provides support and resistance to the market. One of the more notable points are as follows.


With Mathew Verdouw


The Educated Analyst | 26 Trading Between the Lines NOV /DEC 2009 I’ll explain the theory a bit more in a moment, but for

now just remember that those vertical lines are very important. What we see here is that the next top in IPL (some 8 months after the crash) was highlighted in advance by placing this tool on the previous high. IPL made a new major high on the date that we had a square midpoint (I’ll explain that later too). Also you can see that the blue horizontal line (which is the price of the previous high) provides support and resistance, although nearly every trader in the world knows that previous high and low prices provide support and resistance.

The other thing that I look for is if the stock is following the general lines that join critical points in this square. From the first image you can see that the trends in IPL have been following the lines and staying contained by them. Now don’t scream and point to all the times the lines were crossed, this technique is a general guide and one that can assist you in spotting places where there is going to be support and resistance. I actually think of the lines as force fields, they’re not impenetrable, but unless the

stock has enough

momentum, they will get drawn to the lines. Maybe I’ve just watched way too much Star Trek!

All of this has now confirmed

to me that this is a good square and that I can trust this to provide guidance to me as I trade. Normally I would not stop here, although you can. If I was trading long term I would wait for the market to come down to the

red angled line and look for an opportunity to buy, setting a target back near the horizontal blue line. My experience is that the market “bounces” between these lines and that is where the trading opportunities lie. Because it has done it so many time in the past, I have statistical confidence that it is more likely to bounce off the line (even temporarily) than shoot straight through it.

What I want to do now though is add another square. This is important if I am trading intraday as I don’t want to have my stops too far away, and I want to try to catch the intraday oscillations in the market.


The Educated Analyst | 27 Trading Between the Lines NOV /DEC 2009 In this image you can see that I have now placed a Gann Square Top/Bottom at the final low price of the crash in IPL. Again, as you study the image, you can see that the lines are respected by this market.

Here I have put both of the squares that we have been working with on together (I’ve made the first one dashed lines so you can see which square is which). What becomes apparent is that the squares drawn from both points are important. Now we could go through and draw squares from every top and bottom and while I’m fairly sure you would have every single minor turn in the market covered, it would be too cluttered and too difficult to trade from.

Having said that, there is a way that you can use many squares on a chart and get some very powerful information. Have a look at the following stock, CTP, where I have put a Gann Square Top/Bottom on every major turn in the market.


The Educated Analyst | 28 Trading Between the Lines NOV /DEC 2009 In this screen shot I have included the Market Analyst structure panel that shows I have added 14 Gann Square Top/Bottoms and made them all invisible. Then what I did is add a “Cluster” tool to my chart. The Cluster tool goes through all other tools on the chart and counts how many times a line exists on any date (this works with symbols, Fibonacci etc). To give it a bit of tolerance, I have given the cluster a 3 bar tolerance which simply means that if there is a line on one day, we count it on the day before and the day after as well.

What we are looking for is where the cluster peaks, showing us that there are a number of vertical lines hitting the same date. You can see that there is an obvious peak that coincides with a time when this stock went “through the roof” in October this year. The amazing thing is that we knew that something very significant was going to happen beforehand if we took the time to study it.

Oh, and this works no matter what time frame we use. Have a look at this chart of the Share Price Index (SPI) futures in Australia. This is a five minute chart which has a single Gann Square positioned on the recent high of 4897.


The Educated Analyst | 29 Trading Between the Lines NOV /DEC 2009 If you pay attention to the vertical lines, you can see that all the vertical lines are significant warnings that something is about to happen in the market. In this case I have asked the tool to repeat a number of times and you can see that the squares have considerable correlation to what is happening with the major and minor moves on the SPI.

OK, so how do we get those lines? This tool is a classic for the Gann mantra of Squaring Time and Price. What we do is take the price where the square has been placed on, let’s say it is $2.35 then we square that into time, i.e. we set the end of our square 235 bars from now. This gives us our basic box. All the diagonal lines are then drawn between the corners and the midpoints of the square. The tool also has a setting that allows you to show more vertical and horizontal lines at thirds and eighths of the original box. Those lines are again very interesting and very useful on larger squares.


The Educated Analyst | 30 Trading Between the Lines NOV /DEC 2009 Here is our first chart (IPL) with the thirds and eighths

switched on.

In most cases the bottom of the square is 0, so that the height is 235 cents and the width is 235 bars, but sometimes we may apply a price factor to make the squares a bit smaller. This is the thing that I love the most about these squares and what makes it 7 parts science and 3 parts art. It does not matter what scale you use, you can divide all the values by 10 and you will have a good square, you could multiply all the values by Gann numbers 90, 144, 360 and again have some amazing squares. The trick here is to find a square that gives you a descent range to trade between, but not so far apart that you miss the opportunities in-between. So why does it work? Well that is actually a deep philosophical discussion. I personally believe in a very ordered and designed world. Everything follows designed mathematical rules – we just don’t understand

all the rules. I guess this is one of those areas that when we see enough evidence we just have faith. If we open our eyes it’s hard to deny what is in front of us. I know this works and I now know how to trade with it, I’m just grateful to the work of Gann in unlocking this secret that I can use in my trading.

I hope you can see from this short article the power that Gann Squares can offer to you as you trade the markets. I love Gann Squares and my best trades have always been from using them. These tools are available in the Gann Edition of Market Analyst. Call our client services team if you do not have these tools and would like to have a trial of them.

About Mathew Verdouw

Mathew Verdouw is the Founder of Market Analyst Software ( Holding an Honours Degree in Computer Systems Engineering, Mathew set about building a unique technical toolbox that would give traders new and interesting ways to view market data. Mathew’s dual perspective of seeing the issues that face traders as a Trader and also as an Engineer has given him the ability to drive further development into some of the most innovative techniques ever seen by traders.

Mathew can be contacted by e-mailing him at


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The Educated Analyst | 32 Do trading Robots have any role in a Professional Trader’s Toolbox? NOV/DEC 2009


e have all been led astray at some point in our lives. And unfortunately, this has happened to quite a few traders recently. You could even go as far as saying they were hoodwinked.

What am I talking about?

Well, the latest internet marketing craze has been swooping ‘inboxes’ worldwide with cleverly written emails promising obscene trading returns by utilising artificial intelligence that is so perfect no human trader could hope to match its uncanny accuracy for predicting the future.

These promises of ‘overnight financial success’ are too tantalizingly seductive to ignore and we find ourselves succumbing to the greed us lesser mortals posses, and inevitably we reach for the plastic to make that one final purchase we are led to believe will make our dreams come true.

If by now you haven’t figured out what I’m referring to then you are probably one of the lucky few who hasn’t yet fallen victim to the ‘Trading Robot’ or ‘Expert Advisor’ fad taking the world by storm. These robots will trade any mechanical trading system you program them to trade. Unlike humans they can trade 24 hrs a day, and can monitor hundreds of criteria every second. They trade without emotion and always stick to the rules they have been programmed to obey. Sounds pretty good doesn’t it?

So why are so many people that have purchased one of these robots actually losing money?

Most people assume the strategy or system the robot uses is flawed or only works in certain market conditions which no longer exist. Often you hear that these robots are created by computer geeks and mathematicians who have never traded a day in their lives and are just out to

make a quick buck. Some blame corrupt and greedy market maker brokers. In fact there are many excuses made for the failure of such systems but the real truth is actually much simpler.

At UnEarthed Financial we are big fans of trading robots and automated trading systems. Some of the reasons we like them I have mentioned earlier such as the time that they save you in front of a computer, the emotionless way they trade a system and the accuracy with which they analyse the charts. But like most things, trading robots have their weakness, and like any tool you use in your business you need to know its advantages, and just importantly its disadvantages.

The disadvantages of robots are that firstly they can’t change their mind or reassess a situation if conditions change (unless they have been programmed to deal with that specific change). Plus they have no affiliation for Fundamental Research or news releases, market rumours etc .

Currently robots haven’t evolved enough with their programming to monitor and see all the things an experienced trader would see. They can’t see chart patterns that they haven’t been programmed to look for, such as support and resistance levels or double bottoms, double tops, head and shoulders, or candlestick reversals, trend lines and channels. Hardly any compare multiple time frames and the list goes on. In short a robot can’t ‘THINK!’

So the question should be, how should we be using automated trading systems and what advantages do they offer? Well nearly everyone I know that utilises robots uses them differently. Mainly because they can fulfil so many different uses. Let me list some of our uses here and hopefully you will see something that could make your trading that little bit simpler or save you some time.


With Ingela Troha


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The Educated Analyst | 33 Do trading Robots have any role in a Professional Trader’s Toolbox? NOV/DEC 2009 Firstly, the main use in our business is to teach trading

systems to our students. One of the most interesting observations I have made over my 15 years in the financial markets is that so many traders learn a trading system but have wrong understanding of its tools and indicators, therefore incorrectly apply them to charts and wonder why they aren’t getting the trading results they should. The benefits of knowing this information is that you can use your robot as ‘teacher’. We actually provide our students with ‘scripted indicators and calculators’ similar to robots, which we call ‘Trade Tutors’, which in the same way can be used within the Market Analyst software’s Strategy Tester function; Our ‘Trade Tutors’ confirm the correct application of various trading systems to the trader, for example;

 what money management and position sizing to use,

 your entry point to the market,

 where to place your entry stop loss,

 when to have taken profit,

 placements of your trailing stop over time,

 the final exit,

 adjustment of your money management settings according to new account balance.

Secondly, in my own trading I have robots that enter a trade for me and then send me an alert. Once the trade has been entered I can either let it manage the trade for me or I can manually take over and exit the trade myself. The advantage of this is that I can ‘think’ or analyse information the robot can’t. I like to use Fibonacci retracements as well as previous support and resistance levels to calculate a good exit level.

I also have programmed my robots to lock in a breakeven level ASAP, so that if I don’t want to monitor the trade myself, the downside risk is minimised or even totally removed. I should mention though, I have had to

change the way I trade slightly in order to be able to use robots effectively.

Thirdly, if you don’t want to have a program making live trades on your behalf, you can still create a program called a ‘custom indicator’ that will provide you with information that may normally take you more effort to calculate manually (and reduce the chance of human error).

For example a basic indicator might give you a signal when several conditions are met. It may be that you look at multiple time frames and when certain conditions are met on all timeframes you look for an entry to your trade. Depending on that criteria often a custom indicator can do most of the analysing for you, and even alert you that your criteria has been met, signalling your entry.


In general, all we are doing is using technology the same way any other industry does; to save time, money and improve efficiency. We are not yet at the stage of creating artificial intelligence that can think and learn for itself. So, until such time that we can, we should use this technology appropriately and with the respect it deserves.

About Ingela Troha

Ingela Troha is the founder of UnEarthed Financial and has a passion for the financial markets in a career that has spanned over 15 years experience. Early on she saw the phenomenal potential within the direct equities market which lead into CFDs, indices then to Foreign Exchange. As a licensed financial advisor she provides a signal service on the Forex, Australian & US Blue Chip Stocks, Global Indices and Commodities with daily and weekly buy/sell recommendations for subscribers. Ingela also creates educational material and writes for financial publications around the globe and is invited to speak at many seminars and training workshops.



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