S&C 01-2017.pdf

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SEASONAL TRENDS

A hybrid approach

to

optimize

results

8

8 ANATOMY OF A

ANATOMY OF A

BREXIT TRADE

Analyze and proft

from world events

12

12 BE YOUR OWN

BE YOUR OWN

HEDGE FUND

Approach the mark

et

like

the

pros

do

1

6

6 ICHIM

ICHIM

OKU CHART

S

W

e

take

out

the

mystery

20

20 INTERVIEW

INTERVIEW

Denis Globa on trading

system

development

34

34 WEBSITE REVIEW

WEBSITE REVIEW

n

Barchart.

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THE TRADERS’ MAGAZINE SINCE 1982

www.www.

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.com.com

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8 Use Seasonality To Optimize

Algorithmic Strategies

by Karl Montevirgen

It’s not uncommon for markets to trend based on seasonal patterns. So when your system doesn’t seem to be giving you the returns you were hoping for, it may help to turn to seasonality analysis to try and optimize your trading system.

12 The Anatomy Of A

Brexit Appointment

by Eva J. Tompkins and Jody Wong A trade occurs every day, hour, and minute. However, it’s not very often that you get to trade by appointment. Here, we look at the entry, management, and target of a Brexit trade.

16 Be Your Own Hedge Fund

by John Ehlers and Ric Way Think being your own hedge fund is out of reach? Maybe it’s time to rethink it. It could be a lot simpler than you expected.

20 Ichimoku Charts

by Rudy Teseo

Some indicators may appear to be more complicated than they really are. Here, we dissect ichimoku charts and take the mystery out of them.

24 Earnings—Will Performance

‘Trump’ Fundamentals?

by Bani Arora

You often base your trades on opinions, and those opinions can be wrong. What’s the best way to hedge your positions for those times when you could be wrong?

Here’s one way. _n _{Cover: Roy Wiemann}

n Cover concept: Christine Mo rrison/Roy Wiemann

4 • • & C

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INTERVIEW FEATURE ARTICLE

WEBSITES FOR TRADERS

40 • Barchart.com

Market data platform

DEPARTMENTS

6 Opening Position

7 Letters To S&C

47 Trade News & Products

50 Traders’ Tips

56 Futures Liquidity

57 Advertisers’ Index

57 Editorial Resource Index

58 Books For Traders

59 Classiﬁed Advertising

59 Traders’ Resource

28 ETF Sector Investing

by Leslie N. Masonson

Interested in learning more about using exchange traded funds in your trading? This month, we look at factor-based ETFs, as compared to the more traditional market-capitalization weighting approach.

30 Futures For You

by Carley Garner

Here’s how the futures market really works.

32 Explore Your Options

by Tom Gentile

Got a question about options?

34 The Brains Behind A Trading

System: Denis Globa

by Jayanthi Gopalakrishnan Denis Globa, CEO of Multi-Charts and TradingView, has over 15 years of experience in system development and trading various asset classes. He founded MultiCharts trading platform and TradingView online trading com-munity with the intention of bring-ing tradbring-ing system development to the hands of retail traders.

38 Q&A

by Rob Friesen

This professional trader answers a few of your questions.

44 What Now For Banks?

by Koos van der Merwe As we search for investing op-portunities in the new political environment, how attractive are the banking stocks? We’ll take a look at a few of them.

AT THE CLOSE

48 Mean-Reversion Daytrading

by Ken Calhoun

Last month, we discussed swing trading mean-reversion pivot entries. This month, we continue on the same topic but this time for daytrading.

60 How Feelings Inﬂuence

Your Trading

by Claudio Demb

Trading is emotionally demanding. Our feelings dictate our actions and without our being aware of it, tend to make us trade i rrationally. The frst step in battling emotions is to be aware of them.

TIPS

This article is the basis for Traders’ Tips this month. TIPS

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DATA DRIVEN

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Today 3 MO 6 MO 1 Year 2 Year 03/21/2015 3:44:06 PM O 236.02 H 236.20 L227.50 C 229.45 Volume6,228,654 260.00 250.00 240.00 220.00 210.00 200. 1

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CVL INDIVIDUAL (X12345678) 17.45 -0.03 (-0.17%) OPEN POSITION Value $8,725 500 SHRS Cost $8,735 $17.47 Margin Req. $2,616 30.00% Today’s G/L -$10 -0.12% Total G/L -$10 0.12% B 17.45x 515 A 17.45x 1,971 V 45.819.056

CLOSING EQUITY ORDERS

Est. Gain (Limit) $690 7.90%

Est. Loss (Stop) -$260 -2.98%

CLOSED POSITION

YTD G/L $2,735 3.60%

Positions News Research Options 1 Year Support/Resistance (100 Day) Trade Alert CARSON GENETICS

18.79 18.29 17.79 17.45 17.29 16.80 16.30 15.80 15.80 14.80 14.30 S 18.65 S 16.85 $

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O

PENING

P

OSITION

e’ve been through the debates, cam-paigns, pre-election coverage, and what did we end up with? An election result that was different from what was expected. That puts all the speculation and predictions in perspective nicely—at the end of the day, that’s all they are. You can never know wit h certainty what an outcome will be. As trad-ers, the concept of uncertainty is nothing new. Look at how the markets reacted to the election results. The initial reaction in the

overnight futures markets was in line wit h expectations, but the equity markets’ reactions after the election results was another surprise. And now that the elec-tions are over, the big buzz is about where to invest going forward.

We can’t ignore the US debt level, which always tends to take center stage. With debt levels as high as they are, a rise in interest rates will have some im-pact on the performance of the US economy. Bond yields rose right after the elections, which probably impacted the rise in stock prices. The US dollar also moved higher. When you look at these post-election reactions, it points toward a continued increase in yields. And an increase in yields could mean more federal spending, larger defcits, stronger growth, and ination. But this is all, again, speculation.

hat should you really trade? As traders, it doesn’t matter, because as you know too well, expectations can end up being different from reality. If you are into setting New Year’s resolutions for yourself, one thing you could do is to make it a point to know what the markets are doing before they open each day. It’s not about whether you trade or not that day, whether you’re proftable or not, or how much you made. It’s more about being aware of the markets, because it’s that awareness that shows you are committed to learning about the markets. But don’t make the mistake of stopping there, because you still have to place trades to make money. There are many different ways to get somewhere, so with that awareness under your belt, you will be able to steer your trades in a direction that works for you. Be prepared t o recognize market moves, expected or unexpected, and then take advantage of what is in front of you.

What works for you may not work for someone else. Let’s hear what works for you and what you use to navigate the markets. Each year, we publish our Readers’ Choice Awards in our Bonus Issue. Please take a moment to visit our website, www.traders.com, and cast your votes for your favorite trading-related products and services.

Wishing all our readers a healthy and prosperous 2017.

Jayanthi Gopalakrishnan, Editor

EDITORIAL

[email protected] Editor in Chief Jack K. Hutson Editor Jayanthi Gopalakrishnan

Production Manager Karen E. Wasserman Art Director Christine Morrison

Graphic Designer Wayne Shaw Webmaster Han J. Kim

Contributing Editors John Ehlers, Anthony W. Warren, Ph.D.

Contributing WritersThomas Bulkowski, Martin Pring, Barbara Star, Markos Katsanos

The Traders’ MagazineTM

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January 2017 • Volume 35, Number 1

M i a m i D o w n t o w n R i c h a r d C a v a l l e r i / S h u t t e r s t o c k

W

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January 2017•Technical Analysis of STOCKS & COMMODITIES_{• 7}

The editors of S&C invite readers to submit their opinions and information on subjects relating to technical analysis and this magazine. This column is our means of communi-cation with our readers. Is there something you would like to know more (or less) about? Tell us about it. Without a source of new ideas and subjects coming f rom our readers, this magazine would not exist.

Email your correspondence to Editor@Traders_{.com or address your correspondence}

to: Editor, Stocks & Commodities, 4757 California Ave. SW, Seattle, WA 98116-4499. All letters become the property of Technical Analysis, Inc. Letter-writers must include their f ull name and address for vericat ion. Letters may be edited for length or clarity. The opinions expressed in this column d o not necessarily represent those of th e magazine.—Editor

VERTICAL RUNUP

Editor,

I enjoyed reading Thomas Bulkowski’s

article “_Vertical

Run-up”_{in the November}

2016 issue of Technical Analysis of STOCKS & COMMODITIES. I have a few questions if

the author doesn’t mind.

1. In his chart in Figure 1, there ap-pears to be a six-bar vertical runup that he did not use for this article. Was that because it met his criteria but wasn’t needed for this article, or did it fail his eye test/criter ia? It looks to me that it does run up for the four-bar minimum before there is a consider-able overlapping bar (similar to the one identifed as EF with overlap at bar 5). It also has two smallish bars similar to the one identifed as AB. Were either of those two aspects reasons for exclusion?

2. I noticed in a response from Bulkowski to a letter to the editor that also appeared in the November 2016 issue that he uses his own stock charting software. I was wondering if his charting software/database includes charts of stocks that are no longer listed or if it just includes the survivors/stocks currently listed with available quotes?

That could possibly have an effect on the statistics of his chart study in terms of quantity of vertical runup candidates and/or bull market performance of those stocks that survived the entire 18-year study period.

When I studied my stock data pro-vider’s available stocks from May 2008 to August 2011, it had delisted 1,846 stocks in just a little over three years.

From 1995 to now, only a little more than 1,000 stocks have survived being listed for that entire 20+ years in my provider’s database, even though they routinely provide about 7,000+ stocks at any given date.

ED S.

Author Tom Bulkowski repli es: 1. I think you’re referring to the vertical run that begins on October 2, 2015. I wanted to show the two different types of outcome after a vertical run, so that’s why I only highlighted the two shown in the gure. The study ended in November 2013, so this gure was not included in the study.

2. I have two databases that I use for my research. One is for stocks that I fol-low daily. The other is an archive that contains stocks that have merged with other companies, that no longer trade (for whatever reason), or that I choose to no longer follow. I use both databases in my research. I understand your concern about survivorship bias.

Thanks for writing, Ed.

Editor: Thomas Bulkowski’s latest book is Chart Patterns: After The Buy (www. thepatternsite.com), which provides more information and statistics on the vertical runup pattern, including a frequency distribut ion that may help readers gauge when a vertical run will end and the behavior that followed.

NOTE FROM A BOOK AUTHOR AND READER

Editor,

I am the author of six books related to trading system development. I have been a subscriber to STOCKS & COMMODI

-TIES for many years and enjoy each and

every issue.

HOWARD BANDY

We interviewed How-ard Bandy, who is an expert in system development, statis-tics, math, computer science, and modeling, among other things, in the November 2015 issue of S&C (available to subscribers in the article archives at our website, www.traders. com). He published a new book in Au-gust 2016 titled Foundations Of Trading: Developing Protable Trading Systems Using Scientic Techniques. (See our Books For Traders section in this issue for a description.)—Editor Continued on page 42 ®

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8 •

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January 2017

January 2017••Technical Analysis of Technical Analysis of SSTOCKSTOCKS & C & COMMODITIESOMMODITIES • 9 • 9

It’

s

not

uncommon

for

markets

to

trend

based

on

seasonal patterns. So

when your system doesn’t seem

to be giving you the returns you were hoping for, it

may help to turn to seasonality analysis to try and

optimize your trading system.

arket seasonality

and

algorithmic strate-

algorithmic

strate-gies

gies

are

two distinct concepts that offer

a potential “edge” to traders and

inves-tors who use them wisely. Seasonality

tors who use them wisely. Seasonality

provi

des statistical transparency on recur

ring patterns

of market behavior. Algorithmic trading systems

employ proprietary technologies and differentiated

approaches to analyzing and

engagin

g markets with

speed, accuracy, and automation.

Each approach envelops its own unique set of

po-tential. In this article, I’ll explore the advantages that

tential. In this article, I’ll explore the advantages that

might be created by combining them. I’ll begin by

taking a look at the advantages that each approach

has to offer.

The algorithmic advantage

An algorithmic strategy runs according to its own

coded logic. Every person who subscribes to an

algorithmic system is motivated by the prospect of

possessing a technology that can “outsmart”

com-mon approaches to the market, analyzing assets from

mon approaches to the market, analyzing assets from

a unique vantage point, and executing trades with

superior calculating power and speed.

The term “algorithm strategy” brings up a number of

synonymous concepts like automated tradi

ng systems

,

robo-investing, and blackboxes to

name a

few

—all of

which house implicit assumptions:

n

Automated

implies “hands-off”

trading (that

is, it runs by itself)

n

System

conjures up the image of an intelli-

conjures up the image of an

intelli-gentl

gentl

y structured

set of rules and pa

rameters

n

Robo-investing

elevates software-driven

speculation to the level of a responsibly

man-aged portfolio

aged portfolio

n

Blackbox

signies a market approach that is

proprietary, non-transparent, and non-modi

-

-able.

able.

Taken as a whole, an algorithmic strategy conjures

up the notion that it is strictly a “hands-off” system,

that you are not privy to the details of its mechanism

(it’s a black box), and that you should not intervene

by turning it on or off. There is some truth to this,

and some systems have demonstrated robustness.

Nevertheless, there is a possibility that seasonality

can be used to optimiz

e or enhance certa

in strategies

without interfering with their internal logics.

The seasonality advantage

Traders who use seasonality to inform their trading

decisi

ons look for recurring

buying and selling trends

within a calendar year. The notion of recurrent

sea-sonal patterns is fairly easy to grasp with regard to

sonal patterns is fairly easy to grasp with regard to

certain

commodity classes like agriculture (affected

by weather, planting

, a

nd ha

rvesting seasons)

, energies

(supply/demand patterns correlate with summer and

winter patterns), and precious metals—particularly

gold, whose demand tends to peak during India’s

wedding season (among other fundamental factors).

The strength of seasonal trends may be

histori-cally consistent but it can’t be treated as an

cally consistent but it can’t be treated as an

accu-rate predictor—

rate predictor—

not all

years will

show correlation

between prices and seasonality patterns. But that

historica

l consistencies exist is evidence enough that

economically driven transactional activity may be

the driving force behind these price patterns. It’s

R R O O Y Y W W I I E E M M A A N N N N TRADING SYSTEMS TRADING SYSTEMS

Make The Most Of Your System

Use Seasonality To Optimize

Algo

rithmic

Str

ategies

by Karl Montevirgen

M

(11)

10 •

10 • •• SS & C & C

also interesting to note that seasonal buy/sell regularities in

certain commodities have remained prevalent despite

fun-damental bull or bear market conditions.

damental bull or bear market conditions.

A seasonali

A seasonality/algo hybrity/algo hybrid d

Using seasonality to optimize a strategy means emphasizing

longs

longs when seasonal patterns trend upward and when seasonal patterns trend upward and shortsshorts when when

seasonal patterns trend down. In other words, you would use

seasonality to turn on or off buy/sell signals in months that

seasonal patterns tend to be statistically strong.

T

TESTINGESTING THETHE HYBRIDHYBRID APPROACHAPPROACH

If seasonality can optimize a well-performing algorithmic

strategy by emphasizing longs or shorts, then might it also be

capable of optimizing a poorly performing strategy

capable of optimizing a poorly performing strategy as well? Thisas well? This

is what I set out to explore, and here are t

is what I set out to explore, and here are the steps I followedhe steps I followed..

Step 1: Identify a seasonal pattern.

Step 1: Identify a seasonal pattern. I decided to focus onI decided to focus on

the gold market. Based on a 38-year seasonality chart of

gold, the months of August and September

gold, the months of August and September had consistentlyhad consistently

shown a signicant uptrend (Figure

shown a signicant uptrend (Figure 11). As mentioned earlier,). As mentioned earlier,

the rise of gold demand in this t

the rise of gold demand in this two-monwo-month periodth period

was partially attributable to the Indian wedding

season among other fundamental factors.

Step 2: Set rules for modifying t

Step 2: Set rules for modifying the strategies.he strategies.II

allowed for only long position

allowed for only long positions during ts during the monthshe months

of August and September. The reason for this

decision was pretty simple: Since August and

September seasonality reected high demand for

gold, wh

gold, why not follow the historicay not follow the historical trend?l trend?

Step 3: Select the strategies.

Step 3: Select the strategies.It’s ideal to have aIt’s ideal to have a

bunch of systems to choose from. For example,

I can choose from nine algorithmic systems that

focus solely on gold futures. Among those nine,

I chose four that represented the entire range of

performance—from most to least

performance—from most to least protableprotable. Each. Each

system traded differently: Some were daytrading

systems while others took swing or position trades,

one trade

one traded long-only positions, and one was alwaysd long-only positions, and one was always

in the market, while the rest took both long and

short positions at different times (Figure 2).

Note:

Note: Each system combines live and hypothetical resultsEach system combines live and hypothetical results

depending on different points in it

depending on different points in its lifecycle.s lifecycle.

Step 4: Isolate Aug

Step 4: Isolate August and September traust and September trades and comparedes and compare

longs and shorts.

longs and shorts. I focused on the August and SeptemberI focused on the August and September

trades, differentiating performance results between

com-bined long/short trades versus long-only trades. The charts

bined long/short trades versus long-only trades. The charts

in Figures 3 & 4 show the results.

C

COMPARINGOMPARING PERFORMANCEPERFORMANCE ANDAND EFFICIENCYEFFICIENCY

Does the number of long versu

Does the number of long versus short tras short trades matdes matter when ater when a

market is t

market is trending up?rending up?

I’ll start

I’ll start with system 1with system 1, which was the best-performing strat-, which was the best-performing

strat-egy. Among the long trades, 85.4% were protable. Among t

egy. Among the long trades, 85.4% were protable. Among thehe

short t

short trades, 91.rades, 91.7% were protable,7% were protable,but there were signicantlybut there were signicantly

few

fewer short ter short trades—rades—in totain total, 48 trades l, 48 trades were long positions whilewere long positions while

only 12 were short

only 12 were short positions.positions.

It is true the short trades contributed to the overall protability

of this system. But it’s also hard to argue against the fact that

system 1’s protability was attributable to the fact that

system 1’s protability was attributable to the fact thatit hadit had

four times m

four times more long trades than short tore long trades than short trades.rades.

I also noticed

the following about

systems 2 and 3:

Short trades had a

good win rate and

were protable, but

there were between

two to three times

more long trades

than short trades.

The takeaway:

Based on these

ob-servations, staying

servations, staying

Average Gold Performance Since 1975

Monthly average gain/loss in gold 1975–2013

2.5% 2.5% 2.0% 2.0% 1.5% 1.5% 1.0% 1.0% 0.5% 0.5% 0.0% 0.0% -0.5% -0.5% -1.0% -1.0% -1.5% -1.5% Jan

Jan Feb Feb Mar Apr May Jun Mar Apr May Jun Jul Jul Aug Sep Oct Nov DecAug Sep Oct Nov Dec

FIGURE 1: SEASONALITY IN GOLD.

FIGURE 1: SEASONALITY IN GOLD. Gold has shown a consistent uptrend during the months of Gold has shown a consistent uptrend during the months of

August and

August and SeptemberSeptember..

FIGURE 2: SELECT THE STRATEGIES.

FIGURE 2: SELECT THE STRATEGIES. Here you see a summary of the performance of four trading systems that focus on trading gold Here you see a summary of the performance of four trading systems that focus on trading gold

futures. futures. S Sttrraatteeggyy YYeeaar r oof f IInncceeppttiioonn TTyyppee AAnnnnuuaal l RROOII PPrrooﬁﬁt t FFaaccttoorr WWoorrsst t DDrraawwddoowwnn TToottaal l PP//LL S Syysstteem m 11 22000088 SSwwiinng g ttrraaddiinngg ++9988..88%% 22..1166 (($$99,,001100)) $$223300,,330044 S Syysstteem m 22 22000077 DDaay y ttrraaddiinngg ++6633..11%% 11..6688 (($$55,,777744)) $$117744,,223366 S Syysstteem m 33 22000066 SSwwiinng g ttrraaddiinngg ++5599..88%% 11..8888 (($$55,,005588)) $$112277,,669999 S Syysstteem m 44 22000077 PositionPosition (always in market) (always in market) ++1111..66%% 11..1166 (($$4444,,227733)) $$116622,,553333 C C A A S S E E Y Y R R E E S S E E A A R R C C H H

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January 2017 • Technical Analysis of STOCKS & COMMODITIES • 11

with the seasonality trend has shown to make a big difference, as all three systems with completely different trading rules and parameters corresponded with the seasonal long bias.

System 5’s inefciencies

System 5’s performance, an always-in-the-market system, revealed the inefciencies of taking short positions during a historically uptrending season. Its long positions contributed to 94.9% of the total positive P/L. That the short positions con-tributed a mere 5.1% to the total prots brings up a question: How necessary were the short trades?

System 5 took 16 long and 15 short trades, an almost pe rfect 50/50 ratio. Yet the long trades made the bul k of the prot. This means that the short trades—half of the total trading for the months of August and September—not only contributed a mere 5% in prots, but they racked up a lot of unnecessary trading costs. Hence, the trades were highly i nefcient.

HOW TO MANAGE A SEASONALITY-DRIVEN ALGO PORTFOLIO

The possibilities for this hybrid approach open up a poten-tially promising area of research. We encourage you to furt her research this approach in different markets that show strong seasonal patterns.

Sadly, many people who subscribe to or follow algorithmic strategies carelessly alternate between systems, or they turn systems on and off based on nothing other than equity draw-down. They do this even if drawdown falls within expected predetermined ranges specied by the developer. In other words, people agree to subscribe to an algorithmic product yet tamper with the product without any clear or objective basis.

When people do this uncritically, it is usually because they don’t have an understanding of how a system works and are uncomfortable with losses (even if the losses fall within ex-pected parameters), or they believe they can contribute to the system’s performance, or they don’t have sufcient risk capital to trade the strategy (which means they shouldn’t be trading it in t he rst place).

EXPLORE SEASONALITY

Not all strategies will prove to be robust, and you should have a solid working knowledge as to when to keep or ditch a system. But if you are going to inter vene with a system, it’s best to do so with objective criteria. Seasonalit y analysis is one possibil-ity that you might want to explore to optim ize your strategies. It provides historically based parameters and probabilities to help you better manage your decisions.

Karl Montevirgen is a content designer/strategist at Halifax America LLC, a stocks/option, futures, and forex brokerage in Sherman Oaks, CA. In addition to creating and designing content, he has extensive knowledge of and experience with commodit y futures and foreign exchange. He can be contacted through the Halifax America website at www.halifaxamerica. com or by email at [email protected]. FURTHER READING

Montevirgen, Karl [2015]. “Calculating Pip Values,” Technical

Analysis of STOCKS & COMMODITIES, Volume 33: April.

[2014]. “Position Sizing In The Spot Forex Markets,”

Technical Analysis of STOCKS & COMMODITIES, Volume

32: April.

Katz, Jeffrey Owen, with Donna L. McCormick [1997].

“Sea-sonality And Trading,” Technical Analysis of STOCKS &

COMMODITIES, Volume 15: April.

You would use seasonality

to turn on or off buy/sell

signals in months that

seasonal patterns tend to be

statistically strong.

FIGURE 3: LONGS VS. SHORTS FOR AUGUST AND SEPTEMBER TRADES.Here you see the performance of long and short positions in points.

Long vs Short PL (in points)

Long Short

System 1 System 2 System 3 System 4 400 350 300 250 200 150 100 50 0

FIGURE 4: DOES THE NUMBER OF LONG VS. SHORT TRADES MATTER WHEN A MARKET IS TRENDING UP? Staying with the seasonality trend makes a big difference. All three systems with completely different trading rules and parameters correspond with the seasonal long bias.

Long vs Short % of Total PL

0% 20% 40% 60% 80% 100% Short Long System 1 System 2 System 3 System 4

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A trade occurs every day, hour, and minute. However, it’s not very often that you get to trade by appointment. Here, we look at the entry, management, and target of a Brexit trade.

by Eva J. Tompkins and Jody Wong

he referendum of the United Kingdom (UK) on June 23, 2016 that would decide whether the UK would exit the European Union (EU) was an opportunity to cre-ate a GBPUSD trade that could be planned in advance

pursuant to a set of trading rules. Unlike the intervention of the Bank of Japan on March 18, 2011 or the Swiss National Bank’s removal of the peg of the Swiss currency to the euro on January 15, 2015, the Brexit (Britain exit) trade could be anticipated and planned using both fundamental and techni-cal analysis. The appointment was set for June 23, 2016 at 5:00 pm EST.

A completed trade is like a good story. There is a begin-ning (entry), a middle (trade management), and end (when you

exit the trade and make your prot). Fundamental traders had B R E X I T : K A S T A S G R / S H U T T E R S T O C K

Make A Date With Opportunity

The Anatomy Of

A Brexit Appointment

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information from both sides of the Brexit issue. The media had labeled this event as “Brexit” or British exit

from the EU. The event could have just as easily been labeled “Bremain”

or British remain with the EU, but

it wasn’t, so already, a bias had been created by the media toward the exit of the UK from its 27 EU neighbors.

Pro-exit supporters argued that with the passing of Brexit, food costs would go down, a health sav-ings of £350,000 would occur, the immigrant onslaught would not oc-cur, and the United Kingdom would be independent. The argument for remaining in the EU was that a UK recession would be avoided, the UK would not appear to be xenophobic, and the economic prosperity that the UK enjoyed since entering the EU in 1973 would continue.

Upon conclusion, the fundamental traders would surmise that the GBP will go down if Brexit passed, and up if it did not pass. With t he passage of

Brexit, traders would ee to the JPY and CHF, causing these currencies

to go up in value.

THE ENTRY

A trade can only go up, down, or sideways. With Brexit, there were only two of the three choices available, up or down. There are differing lengths of time for staying in a trade, and that measure depends on the emotional personality of each individual trader. A position trader is wil ling to hold a position for a period longer than a few weeks. A swing trader will hold a trade for a few days to several weeks, and a daytrader will typically be out of the trade by the end of the trading day.

There are numerous styles of trading and these, too, depend on the emotional personality of the trader. We will be ana lyzing the Brexit trade using different styles. The highest probability

for a protable trade entry is a conuence of styles that overlap

approximately at the same entry price. Of the thre e main ele-ments of a trade—entry, management, and target—the entry is the most important because the entry will determine the amount of risk in the t rade. Without a high-probability entry, there will be no trade to manage or money to be made.

For our trade analysis, we will be looking at the GBPUSD,

since the USD is the reserve currency of the world. The polls

in the UK closed at 5:00 pm EST and the rst results report ed

were that the UK would be leaving the EU. The GBPUSD began to rise from 1.4520.

Channels help locate optimal buying and selling points while

trading within a trend. Channel traders would look for price

to rise into an entry at 1.4740. In Figure 1, traders can see an

entry of 1.4740 as price returns to the top of the channel.

Bollinger Bands measure price volatility. It is an indicator

that typically expresses bands as a 2% deviation for a 20-period moving average. The purpose of Bollinger Bands is to provide

a relative denition of high and low. When price breaks the

upper Bollinger Band, you would consider price as h igh and

look for an entry for a short/sell position. In Figure 2, price

initially pierced the Bollinger Band at 1.4829.

Fibonacci orharmonic trading uses specic price pattern

ratios to determine turning points in the market. These turning points are based on the idea that patterns are pre dictive since

they repeat themselves. In Figure 3, price has hit a Fibonacci

extension of 127.2 or a price point of 1.4934 for entry on the day of Brexit.

TRADE ANALYSIS

FIGURE 1: TRADING CHANNELS WITHIN A T REND. Channel traders would look for price to rise into an entry at 1.4740.

FIGURE 2: TR ADING WITH BOLLINGER BANDS. When price breaks the upper Bollinger B and, you would consider the price high and look for an entry for a short/sell position. Here, price initially pierced the Bollinger Band at 1.4829.

A completed trade is like a good

story. There is a beginning (entry),

a middle (trade management), and

end (when you exit the trade and

make your proﬁt).

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Price action trading tells you what is and has happened on a chart without relying on an indicator. The trader of this style looks for size, position, location, shape, and character

of each candle that helps to identify the unlled buy and sell orders. In Figure 4, price rose into a previously untested level (1.4960–1.5100) represented by a bearish candle where unlled

sell orders were found.

Whole number traders represent simplicity by placing their

entries, stops, and targets on double zeros such as 1.5000,

which are major whole numbers and a possible Brexit entry. The levels at whole numbers are considered

psychological levels or comforting

for many traders and thus a higher degree of strength or probability is assigned to these more rounded levels. Major whole numbers are followed by major quarters, minor wholes, and minor quarters. In the context of the GBP, these numbers have double zeros except for the minor quarters.

For example, looking at the chart

in Figure 5, if you trade whole num

-bers, you’d concentrate on the selling

level at 1.5000. In Figure 6, you can

see the range of 1.4776 to 1.5100 as a legitimate, rule-based entry region. On a daily chart, the difference in this range was 324 pips.

Here’s where it gets

interest-ing. The best of the ve possible

entries—based on either channel,

Bollinger Bands, Fibonacci, unlled

sell orders, or whole numbers— was the whole number of 1.5000. This level was also suggested by the trading media on television. Based on the move away from this 1.5000 level, a trader could see there was a great amount of imbalance at this level. The trader could tell this by the manner in which price exited this level—with a strong move out and displaying force.

MANAGING BREXIT

The management of a trade is the yin and yang of all traders. Traders want to be conservative and give price enough room to breathe, or move, so that they do not get stopped out. Traders also have an aggressive mindset and want to get as much

prot from the trade as possible, as

soon as possible, while mini mizing

risk. While price is moving in a protable direction, there are

several styles of trade management that could be used to stay

in the trade and maximize prot. Some trade management

styles include, but are not limited to, the use of a trendline, an average true range (ATR), a moving average, and moving your stop while respecting lower highs.

A down trendline consists of a m inimum of two, but ideally

three, points: a high point in price, a lower high to dene the downtrend, and a third lower point for conrmation of the

FIGURE 5: PSYCHOLOGY OF WHOLE NUMBERS. If you trade whole numbers, you would concentrate on the 1.5000 selling level.

FIGURE 3: TRADING FIBS OR HARMONICS. Here, price has hit a Fibonacci extensi on of 127.2 or a price poi nt of 1.4934 for entry on the day of Brexit.

FIGURE 4: TRADING BASED ON PRICE ACTION. Here you see that price rose into a previously untested level (1.4960–1.5100), represented by a bearish candle where unﬁlled sell orders were found.

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strength of the trend. A trendline would not have been viable in this trade because the next lower high created a steep angle that would have an immediate t rendline break.

An ATR measures the average length of a candle on the trade time-frame. If you had used an ATR, you would have been stopped out on the

rst 30-minute candle when price

reacted with a pullback of 250 pips. If you entered at 1.5000, price created

a cushion of 40 pips after the rst

half hour. The art of this trade was

to make t he next 1,650 pips in prot

before exiting the trade.

A trader also had the option of

add-ing onto this trade or takadd-ing prots

as price moved to a projected ta rget.

In Figure 7, you see that i f you used

a nine-period simple moving average (SMA) you would have stayed in the Brexit trade and exited when price broke this moving average.

A stop is the trader’s insurance policy. If you are wrong about the degree of price movement, then you

will be stopped out for a prot or

a small loss. As price moves, you could move your stop to respect lower highs. This method seems simple, but traders have a tendency to become emotional and follow price too closely with their stops such that price does not have the ability or

distance to move. In Figure 8, you

see that if you had moved your stop to respect lower highs, you would have stayed in the Brexit trade.

TAKING PROFIT AND EXITING BREXIT

The satisfaction of having completed

a protable trade is achieved when

the prots are taken. Unlike unreal

-ized prot, real-ized prot can be used

to pay bills and buy groceries.

The turning points in the market that are seen by Fibonacci traders are used for entries and exits. Fibonacci or Harmonic trading uses specic price pattern ratios to determi ne turning

points in the market. These turning points are based on the idea that patterns are predictive since they repeat themselves.

In Figure 9, the target of 1.3351 was forecasted by Fibonacci

traders at 261.8.

Other possible exits, or predetermined target options for a trader, included the bottom of the daily channel, the whole

number of 1.3000, and the 1985 low. In Figure 10, the vari

-ous styles of trading with anticipated targets for the Brexit

trade include channel, Fib number, whole number, and the

1985 low.

After the passing of Brexit, a ripple effect was generated in multiple markets. Gold soared past $1,300.00 dollars. The yields on German and Swiss bonds sank into subzero territory, FIGURE 6: LOOKING AT THE WHOLE PICTURE. Here, it i s clear that the r ange of 1.4776 to 1.5100 is a legit imate, rule-based entry region. On a daily chart, the difference in this range was 324 pips.

FIGURE 7: TRADE MANAGEMENT. If you had used a nine-period si mple moving average for your trades, you would have stayed in the trade until price broke the moving average.

FIGURE 8: USING STOPS. Here you see that if you had moved your stop to respect lower highs, you would have stayed in the Brexit trade.

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$ M A Z E : D I G I T A L S T O R M / S H U T T E R S T O C K

Think being your own hedge fund is out of reach? Maybe it’s time to rethink it. It could be a lot simpler than you expected.

by John Ehlers and Ric Way

hedge fund is an aggressively managed portfolio of investments that uses advanced investment strategies with the goal of generating high returns. Though that sounds daunting, you can do this on your own. What’s holding you back from trying? You are prob-ably thinking:

I don’t have the experience to be a successful trader. •

I don’t know how to formulate a trading strategy. •

I don’t have the technology for an advanced investment •

strategy.

I am worried about the risks of trading. •

I don’t have time. Managing a fund is a full-time job. •

I don’t have the capital to start a fund. •

I don’t know the legality of running a hedge fund. •

In this article, we’ll address each of these concerns a nd show you that yes, you can in fact be your own hedge fund. That is to say, you can manage your own money using proven trading signals while reducing your exposure to risk.

YOU HAVE EXPERIENCE

That you are reading this proves you are almost halfway to the goal of having enough experience. You must be thought-ful, able to consider alternatives, and be willing to lear n from others. Everyone has to start someplace, and the advantage of learning is that you are exposed to the experience of oth-ers. Often, education is expensive. But it doesn’t have to be. You can assimilate the experience of others and learn from their mistakes.

The problem with learning from others’ trading experience is that there is a wide diversity of opinion of what a success-ful trading style is. Your trading style is a selection that only you can make, depending on your preferences and comfort zone. The rst biggest choice is whether you want to follow fundamental data or technical considerations. If you prefer fundamentals, your best approach to being your own hedge fund would be to nd a combination of stocks and bonds that

Go Solo

Be Your Own Hedge Fund

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place you on the “efcient frontier” using modern portfolio theory. Basically, this means you have a mix of instruments using random variables that gives you the best tradeoff bet ween risk & reward. It does not necessarily mean the strategy has the goal of generating high returns.

Since you are a reader of this magazi ne, you probably prefer the technical analysis approach. So let’s start with that. COME UP WITH A STRATEGY

Within the umbrella of technical analysis, there is still a wide diversity—and often contradictory—opinion on what constitutes a successful trading strategy. But the arguments basically boil down to selecting the best combination of prot factor and percent winning trades. Prot factor is the ratio of gross winnings to gross losses and is analogous to the payout in gambling.

If you prefer trend trading, you will necessarily have to be in successful positions for a longer period of time. In addi-tion, you will have to estimate when the onset of a trend has taken place. This means you must take a tentative position and then exit quickly if your estimate of trend onset is not successful. Therefore, your trading will be characterized by a relatively high prot factor due to the big winners and a relatively low percentage of winners because of tak ing many explorative trades.

We prefer short-term trading due to the cyclic content in the data. What’s behind some of this cyclic content? In a nutshell, companies have to “make their numbers” on a monthly basis. Our experience is that the monthly cycle is measurably present in the data, and is there with sufcient regular ity to give you a decided edge in your trade entr ies & exits. In round numbers, a month cycle consists of a 10-day move up and a 10-day move down. If you are only ta king long positions, you will have an average trade duration on the order of 10 days. This means your average risk exposure is less than it would be i f you were expecting the trend to be your friend. This

strategy is simple: Buy on a cyclic trough and exit the trade on a cyclic peak.

THE NECESSARY TECHNOLOGY

You say you don’t have the technology for an advanced investment strategy? Balderdash! The Internet is teeming with vendors vying for your attention. Even our own website, www.StockSpotter.com, ts this category of Internet-based services that provide trading signals or strategies to implement. It is your obligation to do due diligence and to assess the experience, credibility, and track record of any vendor attempting to license t heir trading signals to you.

MANAGE YOUR RISKS

About the only way to evaluate basic potential risk is to examine a historical trading track record. It’s another example of expecting the

past to be a prolog. A minimum requirement for the track record would be that it has been established long enough to cover several kinds of market conditions and should have a sufcient number of trades so the estimates of prot factor and percent winning trades are statistica lly signicant. If there are a number of variables constituting the tra ding system, an old rule of thumb is that the track record should have at least 30 trades per variable. For example, a simple moving average

1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 -$4,000 -$2,000 $0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 TRADING SYSTEMS

FIGURE 1: NORMALIZED PROBABILITY DISTRIBUTION. Here you see a normalized example of the probability distribution resulting from the Monte Carlo simulator by being fully invested in one stock at a time for a year. It creates credible annual statistics from real historical trades where 100% investment is achieved by trading one stock at a time.

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