The Educated Analyst Nov-Dec 2009

A Free Technical Analysis E Magazine for Traders of Financial Markets
Volume 1, Issue 2 NOV / DEC 2009
IS IT OVER? ARE THE GREEN SHOOTS TURNING INTO YOUNG SAPLINGS? OR IS THERE WORSE TO COME?
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 Planets? The results will shock you
And much more.
www.EducatedAnalyst.com
CONTENTS
THE EDUCATED ANALYST
NOV/ DEC 2009 - VOLUME 1 Issue 2
25 TRADING BETWEEN THE LINES 5 BLENDING MARKET REALITIES WITH

FORECASTS
Bennett McDowell from TradersCoach.com 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. Market Analysts 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.
32 DO TRADING ROBOTS HAVE ANY ROLE

IN A PROFESSIONAL TRADERS TOOLKIT?
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.
9 2019 - THE NEXT GREAT DEPRESSION

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.
34 ON THE COUCH WITH CHRIS SHEA

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.
13 THE PROS AND CONS OF BUY-WRITE

STRATEGIES
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.
39 THE POWER OF BAR SPLITS & DOJI

BARS
Michael Parsons shows the potential that the Bar Split and Doji patterns have with short term trading strategies when coupled with the right confirmation.
17 AN INTRODUCTION TO THE
SEQUENTIAL EXHAUSTION INDICATOR
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.
43 TRADING PATTERNS - PART 2

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.
23 SO...YOU WANT TO BE A FULL TIME

SHARE TRADER?
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.
51 THE PLANETARY FAN

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
EDITORIAL
NOV / DEC 2009 - VOLUME 1 Issue 2
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, the reality is that it does not matter. As long as there is volatility, we can make money from our trades. 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.
In this months 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 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.
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
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BLENDING MARKET REALITIES
WITH FORECASTS
With Bennet McDowell 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 cant 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 doesnt 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: Lets 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, Ill 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, Cant 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. Lets 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. Lets 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, youre 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
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 traders 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 trades 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!
NOV /DEC 2009
Below is a chart illustrating how we can use a RealityBased 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.
About Bennett McDowell Bennet McDowell is founder and president of TradersCoach.com 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 www.TradersCoach.com.
This is a chart of the E-Mini (ES H4 contract) on a oneminute 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!
NOV /DEC 2009
2019: THE NEXT GREAT DEPRESSION

With Alan Oliver
Its a scary headline and one that can cause some dilemma amongst market traders. Its 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, lets 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. Lets look at a few examples of 144 in markets:
Source: Market Analyst 6 (www.Market-Analyst.com)
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 5 th low 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.
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So, how does this give us 2019 as a depression target? Using another of Ganns 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 Source: Market Analyst 6 (www.Market-Analyst.com) thousands of times. The number 90 in numerology means change, Most street wise traders look for the half way point and redirection or obstacle. Have a look at the change or prepare to start a trade once the market confirms a redirection in the Australian dollar/US dollar currency reaction at this point. chart, 90 months from the major low at47 US cents in The last Great Depression occurred in 1929. 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. 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
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prices falling dramatically. If we then use our target of 144 months (or 12 years) before 2019, we have 2007 as a markerthe 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 Alans 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 www.tradingwithgods.com.
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THE PROS AND CONS OF
BUY-WRITE STRATEGIES
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 1980s 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 weve 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? Well 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,
With Marcus Addison
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 options 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, youve still earned the premium and the move up to the strike price, so effectively you havent 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.
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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 youve earned as the market moves down. So what suggest? do the studies
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! Lets imagine two alpine skiers, husband and wife, Brad and Angelina. Theyve reached the top of the mountain and being the competitive couple that they are, they challenge each other to a race to the caf 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.
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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. Hes twisting and turning, on some bumps hes even yelling. And the noise is not lost on several beginners looking down from a chairlift, who mention that theyd like to ski like him one day. He seems to be using a lot of energy, but hes having a blast, hes living on the edge. Angelina takes the longer, smoother run with equal determination, passing directly underneath the beginners who dont 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 doesnt notice her. Hes 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 Brads 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 Brads yelling and screaming behind her. Hes now hitting massive airs and taking bigger risks, sometimes coming unstuck but somehow always coming back to his feet. This is his fort and he easily passes his wife without even noticing her. Nearing the caf 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. Shes stopped looking for Brad and has stopped worrying about winning or losing. Brad hasnt 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 doesnt start and Angelina is pretty sure it probably wont 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. Brads course is bumpy, noisy and sometimes dangerous. Angelinas 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 Brads 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
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along her way and she was aware enough to compare her progress to Brads, much like a Buy-Write strategy.
market noise or the quiet. I suppose its 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.
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. Isnt 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.
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 http://www.bellmontsecurities.com.au
What next? Theres no doubt this type of strategy is not for everyone. Furthermore, its 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
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AN INTRODUCTION TO
THE SEQUENTIAL EXHAUSTION INDICATOR

With Jeffery Tie
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. Demarks 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 70s 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.
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Introduction to the Sequential Exhaustion Indicator
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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.
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
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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.
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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.
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Above example shows the delay of the Exhaustion Countdown 13
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About Jeffery Tie
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 Demarks methods. It would be advantageous to do further research for yourself on this tool and Demarks 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.
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.
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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.
SO... YOU WANT TO BE A FULL TIME SHARE TRADER? SAHRESharTrader?
Part 1
With Dale Gilham
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
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 wouldnt 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%.
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So... You want to be a Full Time Share Trader? - Part One
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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 $10s of millions on behalf of clients using his proven and audited investment strategy. His company also specialises in delivering Australias 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 www.wealthwithin.com.au
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So... You want to be a Full Time Share Trader? - Part One
NOV /DEC 2009
TRADING BETWEEN THE LINES

With Mathew Verdouw 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 Ill 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. Its not for everyone, but perhaps its 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 Ive 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.
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Ill 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 (Ill 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 dont 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, theyre not impenetrable, but unless the stock has enough momentum, they will get drawn to the lines. Maybe Ive 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 dont want to have my stops too far away, and I want to try to catch the intraday oscillations in the market.
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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 (Ive 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 Im 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.
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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.
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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, lets 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.
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Here is our first chart (IPL) with the thirds and eighths switched on.
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 its hard to deny what is in front of us. I know this works and I now know how to trade with it, Im 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.
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 dont understand
About Mathew Verdouw Mathew Verdouw is the Founder of Market Analyst Software (www.Market-Analyst.com). 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. Mathews 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 Editor@EducatedAnalyst.com. by e-mailing him at
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[Type text]
DO TRADING ROBOTS HAVE ANY ROLE

IN A PROFESSIONAL TRADERS TOOLBOX?
With Ingela Troha
We 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 havent figured out what Im referring to then you are probably one of the lucky few who hasnt 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 doesnt 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 cant 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 havent evolved enough with their programming to monitor and see all the things an experienced trader would see. They cant see chart patterns that they havent 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 cant 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.
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[Type text]
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 arent 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 softwares Strategy Tester function; http://support.marketanalyst.com/support/index.php?action=kb&article=864 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.
change the way I trade slightly in order to be able to use robots effectively. Thirdly, if you dont 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. Summary 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.
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 cant. 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 dont want to monitor the trade myself, the downside risk is minimised or even totally removed. I should mention though, I have had to
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. Visit www.unearthedfinancial.com.au
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Do trading Robots have any role in a Professional Traders Toolbox?
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On the Couch
Why dont most win at trading when they know whats required: cut losses and let profits run? It seems simple but it seems only relatively few who commence the trading project go on to become consistently profitable. Why is that the case? There can be reasons for the lack of success which can be rationalised. The trader could approach the market as a hobby, as fun and as a diversion from other life issues. Watching a market is inherently interesting and an occasional dabble seems ok. Winning is not as important as involvement. However, although few traders do consciously set out to lose, most do lose or fail to win consistently. There is a real incongruity here. This occurs despite the huge industry in trader education, trading software, and cheap brokerage on internet trading platforms and so on. Whats missing? Why cant people cut losers and work winners? The statement of this simple proposition belies the psychological, intellectual and activity demands required for success. The answer is that to be successful the trader must engage with the imperative and processes of best professional practice. In this article we will cover the psychological foundation of and elaborate on best professional practice for trading success.
With Chris Shea.
true for Over the Counter products as we have witnessed in the subprime crisis). Agree with the market and it will pay you. Disagree, you pay. If you are not winning then you must be disagreeing with or ignoring reality: to win you have to learn how to respond to and deal with reality. Sounds simple and it is. But it is not nearly as easy as it sounds. Knowing the reality that a jumbo jet will lift when the speed of the air over the wing reaches a threshold does not make you a pilot. In life we have to face another huge existential reality that our bodies are going to die one day, and furthermore that life can present terrible arbitrariness and calamity. As our consciousness develops in early childhood this reality is dealt with by repressing it. We develop character attributes that reflect a refuge of denial from harsh reality. These attributes are essentially personal illusions or lies that help us cope. This is an essential coping strategy for a child. But in adult life we can easily become embedded in our general culture that reflects our immature yet comfortable illusions that are predicated on the limitations of fear and denial. Yet this response both personally and culturally is essentially neurotic although appears to be normal. When perturbed by lifes issues we have two choices. New information can either be incorporated enabling us to change and grow from our former limiting beliefs (i.e. accept the challenge) or be denied to consolidate our prejudices (i.e. stay as we are). The choice is stark. The cultural norm is one of hopeless defeat by the fact that we are indeed limited by bodies that will wind down and die. The alternative and better choice is to accept the limitations that our bodies and life imposes upon us and to experience the challenge and liberation of extending ourselves and really going for it. If we choose to trade then we are choosing to interface with one form of reality, market reality, which is much bigger and more powerful than ourselves. This form of
The market is reality Markets tell the truth. If you are dealing on a public exchange then each trade, each and every deal between buyer and seller is recorded and wont be changed. You always know the score in one of the most open and transparent of businesses. Real and precise information is at your fingertips so that you can assess risk and the efficacy of your current position. (This is not necessarily
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Best Professional Practice
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reality is always in a state of flux; its dynamic. Yet its acceptance is a must. Our culturally programmed default life coping mechanism of biases and prejudiced illusions simply wont suffice. You may be able to live in your sheltered comfort zone but neurotic fear and denial makes market success impossible. Narcissistic views that irrespective of the market truth we should automatically win, or that we are entitled to a positive outcome wont suffice either. In addition, acceptance of market reality means that we have to relinquish the idea that the market will conform to our own ideas and views for it. Again we can convert this into a positive. The fact that markets tell the truth makes the trading task easier than many other life projects. The market always lets you know the success or failure of your current trading position each moment in time. Rather than deny this reality, the rational response is to assume responsibility for taking advantage of the truth. In other words the market tells you when to cut and when to hold irrespective of what you may happen to think or feel at the time. We have to overcome our neurotic tendencies and grow if we are to accept and then harness the market reality. If we dont accept the reality of the market then we are doomed to failure. Denial in the market can be catastrophic.
evidence that indeed becoming outstanding is not worthwhile. In trading there are plenty of gurus that can conveniently fulfil the role of hero for you. Nevertheless we have the capacity and power for creativity and self actualisation not only so that we can deal better with lifes realities but also have successful and purposeful lives. This is the process of growth or self actualisation that is a requirement for a healthy and a more satisfying life. Rather than just going through life we need to engage with our super conscious selves. This is the place in our psyches where we acknowledge and use our latent courage, resourcefulness, creativity, decisiveness, clarity, and inner wisdom as well the sense of gratitude, love and altruism. Some psychologists call this the heros journey. Without your personal heros journey you are prone to just exist, to cave in to ordinariness, to be unfulfilled so that you will realise on your death bed that you never extended beyond your comfort zone; that you have essentially blown it. Tragic! In essence the legitimate task of growth and success is to become your own hero: to have the courage and self belief to initiate, enjoy and learn from the ups and downs of your own heros journey. This is what we need to tap into for trading success. To become successful in trading you need to embark on your own heros journey. Of course many people have successfully undertaken the heros journey in the markets. There are plenty of really successful traders around. Some like to take their success public and even perhaps create courses based on their approach and understandings. One thing you have to guard against is that you dont project onto a market guru in order to replace your own heros journey. Its a common trap.
Heroes A common feature of the human trapped in the cultural norm of denial and mediocrity is the search for a hero who has been able to shine. It may be a movie star, sportsperson, a politician, or someone outstanding in ones area of interest. The idea is that the individual can transfer their own need for liberation and achievement onto the hero so that he or she can remain comfortable without threatening their own illusions. Of course if the hero falls then there is someone to blame and more
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When you read books by, and pieces about successful market traders, a couple of key points should emerge. Firstly, success is doable by ordinary men and women like yourself because they have chosen to be different from the norm. They exhibit dedication, resilience and disciplined focus on cutting losers and working winners. Secondly, each market wizard has achieved success in an individual way. They all are indeed different from each other. The pathway to success is different for each individual. The heros journey is unique to each. Indeed the courses and insights of market gurus are worthwhile. They are very useful success models to commence your practice. They show you the journey can be done, but you have to derive and apply your own uniqueness. Unfortunately, following a guru does not guarantee the success they achieve as your own. Only you can do that when you employ the template of cutting losers and working winners and choose to risk the venture of your own journey.
You already use it consistently and diligently when you drive your car. It enables you to continuously drive safely and precisely so that you get to your destination despite complex changing conditions relating to the road and traffic. When you drive, you continuously engage the feedback model instant by instant. Notice something really important here: you trust yourself to flawlessly and instantaneously do what the model suggests when you are in command of your car. You take complete responsibility to engage and adhere to the process when you drive. Because you have practiced the skills in many situations, you implicitly trust your capacity to implement the actions the model mandates. Denial of information flowing to you via the model could be so disastrous that you could endanger others and even lose your life. When you drive, your use of the model is unconsciously competent. You are in the zone. Since you learn to use this model successfully when you drive, doesnt it stand to reason that you can learn to engage and adhere to the model in the trading environment? Its a must and this is where I start to create best professional practice in clients. This is what the market heroes do. Now lets have a closer look at the model as it applies to trading. A key point I want you to note is that it is a complete feedback loop. Each stage is important. Furthermore, the model is applied consistently and continuously time and again without fail. Once one feedback loop is over, another is ready to commence. Each individual trade is conducted on its own merits independently of the previous one within the context of the model. The success or failure of your next trade is physically and psychologically independent of the past under this model. Too often beginning traders err by acting as if this current trade is a rerun of the previous one or two. Now this model requires you to focus on what is
A model to create your success Knowing that your journey is doable because others have done it, do you have to go on it blindfolded? Certainly not! I would like to share with you a model that I use to help individual traders become professional and to reach for success. Here it is in its basic form:
This feedback model is not only useful for traders but also is applicable to many life situations.
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happening at this moment just as you do when you drive your car. One of the biggest ways traders come to grief is that they trade their selves: they narcissistically trade what they think and feel and what they want rather than the reality of what the market is presenting to them now. The feedback model allows you to trade the market so that you can be detached and free to act in line with your objective observations and evaluations. You dont have to guess the future; you just have to act appropriately now if your observations and monitoring tell you to do so. Keep working the model and you will achieve your desired outcome. Now lets turn to the key elements of the model. Unfortunately there is a misbelief out there that if you dwell on getting the best observations you will surely win. In other words it is easy to become over reliant on analysis. This is encouraged I think by non traders who pedal analytical software. However its what you do with your observations that is important to trading success. The role of observation is to identify points at which risk is worth taking. Unfortunately many try to analyse risk out of the trade entry. Remember the risk reward relationship: higher risk equals higher reward. We are looking for quality set ups in the current trend and volatility conditions that will give the biggest bang for our buck. We are not looking for certainty because the reward would be inconsequential. We are instead observing those conditions that when traded upon create a return that covers losing trades together with making the business very worthwhile. Since 20% of your trades will give 80 % of your profit, the observational task is to identify for execution that premium 20%. Some spend so much time on observation that when its time to act they cant do it. They become immobilised by fear that the trade wont work or hesitate waiting for more confirmation. Of course hesitation can only reduce the reward if the trade does go on to be a winner. On
the other hand some are so eager to pull the trigger that they act impulsively rather than wait patiently for a premium set up to occur. Both hesitation and impulsiveness are the by-product of that neurotic denial of market reality I mentioned earlier. The next stage is to act on the observation. This is where work for the successful trader begins. Unfortunately for many this is where it ends. Of course you have to believe your observation has presented a quality entry for you to act. But there can only be two outcomes. Either the trade will work or it wont, and the model prepares us for that. If you observe and act and dont employ the full model, you are gambling. At the track you select the race horse you like and put your money down. Then there is nothing you have to do. You just have to accept the result at the conclusion of the race. The full model is not available to the race track or casino gambler. But a professional trader cannot gamble because the race is never over in markets. He or she is a risk manager and monitors and evaluates in preparation for the next action which will inevitably be called for. This is imperative in leveraged markets whereby unlike the track gambler you could lose much more than your original stake by not monitoring, evaluating and acting. Monitoring, that is observing whether your position is advancing or retreating as the market moves on, and evaluating for your next action, whether it be attacking or defensive, are crucial elements of the model. When you are in a trade you need to remain responsible for the outcome. You must maintain vigilance and be prepared to act. You cannot afford to go to sleep at the wheel. If the trade begins to fail it will be cut (remember the stop loss idea) and you go on to a fresh cycle of the model. On the other hand if the trade goes well then the action of holding onto it and possibly adding to it will be called for (remember the work your winners idea) as
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long as your continuous monitoring of the market calls for this. Monitoring and evaluation continues until the market indicates the move is over. Action: take the profit. And then what happens: the model kicks in for a new beginning as part of an ongoing process. So by now you will have concluded, the model I have presented here is a Stimulus- Response model as a basis for successful trading. Observation and monitoring gather the stimulus from the market for the response which is to act according to what is happening in the market. You have to learn to trust the model by applying it at first consciously and deliberately in controlled conditions, just like when you learned to drive a car. Ultimately it is a question of your personal choice to take response-ability, the ability to perform a correct response (act) in accord with the truth the market is presenting to you now.
About Chris Shea Chris is author of Licensed to Profit by Trading in Financial Markets. Chris holds a Bachelor of Education, Master of Science as well as a Diploma of Professional Counselling. While based in Brisbane, Australia, Chris has private and institutional clients in Australia, New Zealand, Ireland, USA and Singapore. www.themarketcoach.com Do you have a question that you would like to ask Chris Shea? Email your question to thecouch@educatedanalyst.com
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THE POWER OF
BAR SPLITS AND DOJI BARS

With Michael J Parsons
However, bar splits that use actual highs and lows are also common. A Doji bar is a reference to a bar with a similar open and close. In Candlestick terminology this term's definition is very limited, but in our use, any bar that contains a similar open and close, or even an extremely narrow difference, qualifies.
Hidden within the realm of patterns and candlestick formations exists a simple, yet powerful indicator of market bias. Markers of support and resistance that reveal tell-tale signs of when momentum begins and ends. These subtle markers are known as Bar Splits and Doji bars. The term Bar Split refers to two bars with a distinct horizontal point of reference dividing them.
The advantage of both bar splits and Doji bars is that they both provide a very narrow reference point from which a trader is signalled to buy or sell. For a trader this narrow reference point translates into a small risk exposure. When dealing specifically with bar splits and Dojis the focus is the actual close and open of each bar, not the high or low, in relation to neighboring bars. How the market responds to the open and close determines how it is best traded. When using a Doji bar, which has the open and close at the same level, a following bar that moves higher away from that level would signal a buy while a following bar that moves lower would signal a sell. This is considered
Typically this division is seen by peering into the subtle difference between the open and the close of one bar as compared to another (Where the main bodies of the candles do not overlap. The body of a candle is the price difference between the open and close), rather than the difference between their high and low.
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even more powerful if the move is in line with a prevailing trend. In the case of a Bar Split, when one bar closes and another opens at the same level, then a move in either direction would signal a buy or sell. As is true with the Doji bar, this is more powerful if it is line with a prevailing trend. So in both cases, the close sets up a potential trade based on what occurs with the following bar or bars. To qualify, the bar has to be either a bar split or a Doji and the open of the following bar or bars has to be either at the same level as the prior close, or in the case of a trade in line with a prevailing trend, greater than the close in the favour of the trend. In the case of a Doji bar that contains a similar open and close, this open/close level sets up a natural point of support and resistance. Although a following bar may have a low or high that exceeds this level temporarily, its own close in relation to the Doji bar's close typically sets the tone of the bias within the market. Sometimes this bias only lasts a few bars and other times it will set off a trend that will turn out to be very substantial. In the latter case it is common to see repeating Doji bars and Bar Splits occurring in support of a prevailing trend, so they often provide a repeat performance. The Bar Split may be different from the Doji bar in that the similar open and close is actually between two or more bars rather than just a singular bar, but the principle is still the same. There is a distinct level that forms based on the open and close that will act as support and resistance. While a Bar Split can be part of a wide break between open and close, such is the case with a gap formation, usually the split is actually the exact same price. Because you are dealing with multiple bars that can still have their highs and lows overextending one another, the split can easily be overlooked. While subtle, the open/close is still typically at the same price level and so when price does move
away from this established price, it typically signals that the market is trending. The principle of using the open/close level of a Bar Split or of a Doji follows that of using any other support and resistance level as a tool for trading. A trader would look to buy and sell directly off of this level, particularly in the direction that price has already established itself previously. So if an upward trend is in effect and a Bar Split occurs with the secondary bar moving higher, then a buy would be taken from the open or as price rises during the formation of that secondary bar. This principle is an easy one to follow and trade, but there are a few special considerations that a trader needs to be alert to. We will consider a couple of the more common considerations. The first consideration is that the focus is on the body of the bar or its close and open, not the high and low that it forms. When a Bar Split forms, it is not uncommon for price to move slightly in a contrary direction just before reverting toward its real trend. This action will result in a slight overlap of the prior bar early during its formation. Since the ideal situation is to enter early when a bar split is identified, how does a trader handle this move against the trend and still protect himself? A Bar Split is best traded as a continuation pattern, so during this initial retracement it is best to hold off on any trade entry until it returns to the Bar Split level and begins to gain ground in the trending direction. For example, if a bar closes at price 1202 and the following bar opens at the same level, but then initially dips down to 1201 then a trader would hold off on any entry. When price returns to 1202 and begins to move higher, such as to 1202.25, then it is time to buy. Particularly during times of consolidation it is best to wait until price reveals its hand and moves, even if it is just slightly, in the expected direction before making a trade. An exception to this rule would apply if it is already obvious that a strong trend is in effect, in which
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case a trade entry could be taken directly at the open, as long as it matched or exceeded the prior bar's close. The trade entry should be at the prior bar's close or greater, so an entry can be made as the following bar opens if it is the same or greater than the prior bar's close. If an entry is taken at the prior bar's close level, and price then moves against the trend, then simply setting a reasonable limit would be appropriate. This raises the issue of how to set a stop, which is our second consideration. Setting a stop or stop limit that allows a reasonable amount of protection in case any market moves against you and yet ample room to give it an opportunity to move in your favour is a skill, but certain straightforward rules apply when using Bar Splits and Dojis. However, even with these rules there are exceptions based on how and what develops. Typically a stop can be set at a preceding bar's body that is out of range of a Bar Split or Doji bar, which includes the preceding bar's range between the open to close, with particular focus on the close. As an example, if a Doji bar closed at 1202 and the prior bar's close is the same, but the bar prior to that one closed at 1200 then a price just below 1200, such as 1199.75, would be used as a stop. The reason for using a bar that is out of range is because a slight spike against the trend is common and therefore should be taken into consideration. The close of this prior bar would represent a secondary level of support or resistance and exceeding this would decrease the odds of success dramatically. This approach should provide sufficient room to allow a trade to move into your favour while protecting against catastrophic loss. This simple stop limit rule can be used to follow the price movement as it trends as a means for locking in profits. Of course, there is always an exception and that applies here with this stop placement rule. The exception is when the prior bar has an extremely wide price movement, which is sometimes referred to as a panic bar, and price then moves against this bar. Such a bar
would require quite a substantial price risk when using it as a reference. So in the case of a very dramatic move well beyond that of a normal bar's range a stop would instead be placed at the halfway point of this prior bar. Simply divide the bar in half and use that price level as your stop. This is typically still a heftier stop less than would be applied normally, but this adjustment will reduce the risk by half. Any time you see an unusually strong bar retraced by price then you can count on the fact that the momentum has dissipated and the move is in trouble. This action is typically easy to recognize as it develops, so there is no need to allow losses to mount up. Do not wait until price reaches a preceding bar before taking an exit. As a reminder, this exception applies to an excessively long bar, well beyond a normal range, so knowing the normal limits of the market that you are trading is necessary to apply this exception. Keep in mind that this exception can't be applied in a market where excessively long spikes are very common. For example, many Forex markets are prone to excessively long spikes while the activity between open and close may typically still be narrow. Markets such as this are best traded avoiding the exception and using the limit mentioned earlier, by focusing on the close of the bars. The second consideration before entering a trade is that of the overall bias of the market. If a higher time frame shows a downtrend and on a lower time frame you are considering a buy based on a short term up-trend, then the odds of success will be reduced. Looking for trades where a slightly higher time frame has already demonstrated Bar Splits and Dojis in line with your lower time frame trade will dramatically increase the odds of success. For example, if you are looking to buy on a 1minute time frame and the 5-minute time frame already has a Bar Split in your favour. Or if you are looking to buy on the daily, and the weekly chart recently had a Doji bar that was favorable for a buy. This is not to say that a
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higher time frame Bar Split or Doji is always necessary, but they do make life easier when it comes to the bottom line, so they should be the preferred trade situation. Image 2 shows two time frames, the 10 minute and in the lower right corner a 1 minute chart. Note that the 10 minute chart shows a bar split favouring a buy. Although recently the 10 minute had been in a short downtrend swing, overall it shows a much longer and stronger uptrend. On the 1 minute chart in the lower right corner of the image we see a situation where a bar split has already occurred once in favour of a buy and the current bar is opening at the prior bar's close, signalling a buy.
Splits is when the market is already tending strongly and your trade is in line with the strong trend. Bar Splits or Dojis provide a subtle but well defined trading point of reference. Since they tend to appear frequently, they make great additions to any trading arsenal. By identifying that point of reference, a trader has the opportunity to enter a low risk trade that might otherwise be missed. Although they may only contain a few bars, or even just one, the power of these subtle points of reference can be amazingly powerful. Look for them and they will reveal hidden gold.
The third consideration is that of market condition, in which case there are two factors, volatility and whether the market is trending or consolidating. Low volatility and times of consolidation are notoriously challenging to trade successfully. Bar Splits and Dojis during such times will often be accompanied by very limited moves. In contrast high volatility and strong trending markets will show Bar Splits and Dojis producing much more profitable and easier trades. So obviously it is during these latter market conditions that the preferred trades will be. The very best scenario for trading Dojis and Bar
About Michael J Parsons Michael J Parsons is a professional futures trader and published author of several trading books and courses. He is a pioneer of several new and unique methods of trading that are revolutionising how markets are analysed and traded. His astounding market insight and ability enabled him to publicly predict in advance the exact week that the 2008 decline of the S&P market would begin, and to even forecast just how low it would drop. For more information about http://www.greatesttradingtools.com/ his work visit
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TRADING PATTERNS
You might remember in my last article I was talking about Double Tops and Double Bottoms. In this article I will conclude my thoughts on Double Tops and Double Bottoms and then talk about Head & Shoulder patterns. Double Bottom A Double Bottom is merely a reverse of a double top, and all analysis is identical, just with a different price direction. A very good use for them can be to assist in getting into a transaction we would have otherwise stayed out of for various reasons. In the NAB example below, most traders would have not entered on the directional change in March of 2000 because of the existence of the significant resistance level at $23.39, which we can clearly see, is in the same
Part 2
With Peter Varcoe
they cancelled each other out and the resistance was of no concern. Entry at approx $22.37 with a stop at approx $21.30 gives a trade risk per share of $1.07 and an expected resistance at $23.39 showing a potential profit of $1.02 show a reward to risk ratio of 0.95 :1, totally unacceptable for most people. The resistance at $23.39, however was of significant concern, but when looking at the bigger picture, taking into account the double bottom and its target of approx $25.16, we get a different picture. Entry at approx $22.37 with a stop at approx $21.30 gives a trade risk per share of $1.07 and an expected target at $25.16 showing a potential profit of $2.79 show a reward to risk ratio of 2.61 :1, totally acceptable for a Blue Chip company and most people would happy enter the transaction based on this RRRThe double bottom target $25.16 has a significantly higher in probability of being reached than the price stalling at the $23.39 level, therefore opening the reward to risk ratio up quite significantly, as we can see, and therefore allowing a directional change entry, which proved to be a profitable transaction.
area as previous resistance going back to 1998. This previous resistance would have not allowed sufficient reward to risk for many people and as a result they stayed out of the transaction. The resistance from the Double Bottom here was so close to the entry price,
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Overall, a double top or bottom can be very useful to the technical trader who knows both their strengths and (importantly) their weaknesses, and uses them in their calculations accordingly.
Head & Shoulders A head & Shoulders pattern is another trend change pattern, but this is stronger than a Double Top or Double Bottom. Like Double Top/Bottom, there is a lot of information written about Head & Shoulders patterns and their application, the research and testing conducted by myself, Robert Lennox and Leon Wilson, has debunked many of the myths about this pattern and simplified its, identification and use. Head & Shoulders is also known as a Primary Trend Change pattern, as opposed to a Double Top/Bottom, which is a trend change pattern. A Primary Trend is generally recognised as being a minimum of 12-15 months in duration, where as a trend only has to have higher or lower highs and lows And can be as short as a couple of months. Possibly the best example of Head & Shoulders which I have seen is Fairfax at the beginning of this Century, as shown next.
A Head & Shoulders has a trend coming into a significant high point, followed by a retracement which may or may not be a trend it does not matter here. This is followed by a new rally or trend to provide a higher high, followed by a (usually) sharp fall and then by another rally, and then another fall. The first high is called the left shoulder, second high is called the Head and the third high is called the right shoulder, with the 2 lows being called the left and right neck points. When we draw our lines on, as above, we see this multi triangular formation with a higher central triangular shape and this is where the name comes from, the head being higher than either of the shoulders. The psychology behind this pattern is that there is a strong trend running into the direction change, followed by a fall and then by an exhaustion rally, then directional failure, this failure is confirmed by price action, penetrating and closing below the neckline.
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The target on a Head & Shoulders is determined by taking the distance vertically from the top of the head to where it intersects the neckline, and is then applied to the point of break below the neckline, as demonstrated below. We had to go to monthly charts to get a look at the bigger picture, while the target was $2.05, there was a lot of support, over a number of years, 1994 - 1999 at around $2.30, which you can clearly see if you go to monthly and look back 5 years, that this could also be looked on as the target range for this particular pattern.
This pattern did not specifically reach its target, but in October 2002, the price did get down to $2.44, which could be seen to be, arguably, within market noise level of the target price. For the price to reach market noise level from the target seems to be close enough with either, the Head & Shoulders and Double Top / Bottom patterns, to say they have reached their target, or close enough to it to have completed their influence over price action. Because these patterns have such a strong influence over the price direction, an entry signal which goes against the predicted direction from the pattern could be seen to be a much lower probability than if the pattern was not there, and as such could also be seen to be very unreliable as a signal. Once the pattern reaches its target however, its influence over price action no longer exists and we can then look forward to entering any confirmed entry signal we can find at that point
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The real benefit for me at the time with this pattern was the lesson learned from my Mentor, Robert Lennox and his guidance when I identified a potential Falling Resistance break in 2001.
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Falling Resistance about to be penetrated, MACD will confirm, if price penetrates the upper Market Noise band. I asked Rob what he (he was my teacher of Technical Analysis at the time) thought of this for a trade. I was told to go back to the basics of what I saw, and come back to him with relative probabilities, and would hopefully answer the question for myself. I looked at the Head & Shoulders, and compared the probability of that reaching its downside target, and then compared that to the probability of the directional change being successful. When I got back to Rob, he pointed out that I had indeed answered my own question, so I did not enter the trade, based on the H & S influence over price action being higher than the change of directions influence. Was this the correct decision, 3 weeks later I wasnt so sure, but 23 weeks later, when the price action would have stopped the trade out at a loss after 23 weeks with no real place to have exited with a profit in the meantime. As we have seen previously with this pattern, the Head & Shoulders influenced the price in its total run down to $2.44.
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Inverted Head & Shoulders This chart is of Boral, showing an inverted head and shoulders formation.
apply this dollar value to the point where the confirming week for the pattern crosses the neckline as shown. You will all be able to see that the target here is very near the existing, established resistance level from the weeks ending 13th March & 8th June 2007. What I do find interesting with both of these trend change patterns head and shoulders and double top / bottom is that the targets from them are frequently near previously established support or resistance levels.
These formations work in exactly the same way as a normal head and shoulders, only in reverse. Here we can clearly see the primary trend commencing the week ending 8th June 2007 and bottoming the week ending 13th March 2009, a period of 20 months, we then see the strong rally till the week ending 8th May 2009, followed by an exhaustion retracement, to then see the price rebound from mid July. The price closed above the neckline during the week ending 24th July 2009, confirming the head and shoulders formation and setting the price target of approximately $6.98. To identify this target we can use Fibonacci price extensions, or simply calculate the dollar difference between the low point of the head (A) and where a vertical line from the low intersects the neckline (B), and In Summary This was a practical exercise in how we can use these patterns to help us trade more profitably, by sometimes staying out of a transaction by taking into account the bigger picture. Since that time we have all (Robert Lennox, Leon Wilson, myself and many others) done a great deal of research on these trend change patterns and come to the same conclusion, they are unreliable as trading patterns. However, when we look at the bigger picture, where their influence lies and then use this information for trading purposes, they can be of enormous benefit to us, as traders by helping us identify more potentially profitable trades, along with helping us identifying potentially losing trades.
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These patterns, as discussed, have proven to be unreliable as trading patterns over the years and this has a great deal to do with the fact that frequently, when they penetrate the neckline, they whip around this neckline for, sometimes, two or three times. This would have the effect of triggering an entry signal, only to be followed by having the initial stop triggered, mostly within 3 weeks, thus causing a loss making transaction. Many people reduce the amount of information they have on a trading screen, to help them to better see what is happening now, and I can understand the reasons for this, and they do make sense. However, it could prove prudent to also look at the bigger picture, in order to determine whether there are any other influences over price action which cannot be seen with only 12 18 months of weekly data on the screen. A good example of this is the situation with Fairfax, which was shown here, with only 18 months data on the screen, we saw a fantastic down trend with four points of contact on the trendline, three of these being major high turning points, making this a very strong trend, which was about to change directional, giving a very valid signal on this change. A confirmed entry signal, which we did get, would have had us enter what proved to be a losing transaction. However, when we had 3 years of information on the screen, an entirely new picture emerged, which showed a major head & shoulders formation formed and confirmed, prior to the possible directional change. This head & shoulders formation has a much stronger influence over the likely direction of price than the possible directional change, which helped keep us out of what proved to be a losing transaction. Basic Rules: Identify the pattern
Identify the target Identify the pattern confirmation Once the pattern has been confirmed Trade continuation direction of the target entries in the
Ignore directional change entries prior to the price reaching the target I would caution any trader to endeavour to keep an eye on the bigger picture involved with the charts they are trading, looking for other influences over price action which they may have not seen so far. Remember, Capital Preservation is your primary purpose in trading, profit is secondary, the cruel mathematics are, if you lose 25% of your capital, you will need to make 33% profit just to break even. If you lose 50% of your capital you need to now make a 100% profit to break even, and this last scenario is unlikely to happen if you have just lost 50% of your capital. Many people ignore the influence of these patterns and then wonder what went wrong when they have a losing situation. My mentors and I believe that to ignore the influence of these patterns, is to do so at your own potential peril. In the next issue we will commence on the trading patterns of Flags, Ascending / Descending & Symmetrical Triangles and also Pennants. These patterns are continuation patterns and have proven highly to be a highly successful tool for the technical traders who have or can master them as part of their overall trading strategies. While this series of articles is about patterns and their tradability and reliability, I would like to point out that successful traders have a range of proven entry and exit techniques in their armoury of tools, and are able to
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adapt to changing circumstances, as has been made so obvious by the events over the last 2 years. We can explore this concept in details after the pattern series if there is a demand for this concept.
About Peter Varcoe Peter started learning about trading with Wallstreet Group from Melbourne in 1999. He then joined the company to head up the Queensland Branch in March 2000. He left Wallstreet Group during 2002 and Joined Stock Market Investors Group to help with their program of educating Primary Producers, and for the next 2 years was educating Primary Producers in Victoria, Queensland and Western Australia. Peter joined Australian College of Financial Education as Senior Lecturer in 2005 and contracted to them for education, a position which he still holds today. Peters experience is mainly in shares and CFDs but Forex is filtering its way into his trading for future incorporation. He has done many thousands of hours work with patterns, in particular, flags, pennants, triangles and has developed some very specific, reliable techniques around these continuation entries. Peter heads up Aztec Trading & Training which is a subsidiary of WIN Financial Group incorporating WIN Financial Network and WIN Investors Club. Peter Varcoe can be contacted PeterV@WinFinancial.com.au. through his e-mail
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THE PLANETARY FAN

With Mariano La Rosa W.D. Gann charmed many students and traders with his brilliant insights into the harmonic laws that bind natural phenomena to the financial markets fluctuations. As Known, the Gann Theory is based on two main pillars: Time and Price, linked together by a mathematical relationship, graphically expressed through the "Gann Angles. The Gann Angle is a series of straight lines of predetermined slant, with a growing rate of so many price units for each time unit. The time unit could be one day, one week or one month, depending on the time frame used in the chart. What is most fascinating about the Theory is the time factor that is no longer exclusively linked to the calendar year cycle, but also to that of the other Planets rotating around the Sun. You can enter any activity listed in the planetary context by Planetary Angles Task available in Market Analyst, by an algorithm processing the price into a planet, so that you can test the aspects of conjunction, squaring, opposition, etcetera, between the price and other planets. We are talking about the following algorithm: former, the Time is expressed as a fraction of the solar cycle (days, weeks, months, depending on the frame used in the chart), whereas in the latter, the Time is expressed in degrees. An example can explain the difference between the two angles as follows: On a daily chart a Gann angle, with price factor equal to 1 per day, will have a rise of 360 points after 360 trading days, while a Jupiters Helio Planetary Angle will take about 12 years to rise 360 points, because this is the necessary time it will make a complete revolution circle around the Sun. From this example we can say that Gann Angles are nothing more than an estimation of Solar Angles. Lets have a look at an example of practical application of the Planetary Angles: In Figure 1, the rising line is a heliocentric Mars Angle rising of 1/64 each degree longitude. Between the 25th till the 28th of August, Generali Ass. had an average price of 17.70. Adopting a price factor of 1/64 and applying the algorithm of transforming a planet into a price, we get:
(Price / price factor / 360 - INT (Price / price factor / 360)) * 360 = longitudinal position in degrees
17.70 / 0.015625 / 360 = 3.14666
While the aspects between two planets (such as a conjunction) can identify a reversal time signal, the Planetary Angle, representing the graphical summary of the conversion of a price into a planet, is helpful to identify support and resistance levels.
Removing the integer part and multiplying the result by 360 we get:
(3,14666-3) * 360 = 52.8
The main difference between the Gann Angle and the Planetary Angle is related to the time factor: in the
The result means that while the planet "Generali Ass is pricing 17.70, it is placed at 52.8 of the Zodiac, in the exact position where Planet Mars is travelling in those
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days. As both are in the same position, then we can say that they are in conjunction, and consequently the price will tend to diverge from that harmonic equilibrium and cause a retracement. Figure 1:
The following example is about a Planetary Fan application concerning the COMIT Index representing a Global Index of the Italian Stock Exchange. In the monthly chart in Figure 2, we can see how the Planetary Fans 2x1, 1x1, 1x2 just seem classic Gann Angles, but in fact they are built depending on the location expressed in heliocentric longitude degrees of the planet Jupiter. We used a price factor of 8 for the 1x1 angle, meaning that this angle has to increase 8 points per Jupiters degree, which takes about 11 days to move one degree of rotation around the Sun. We placed these angles on the 1992 low, on the 2007 high and on the 2009 low: and what immediately shows is the sometimes extraordinary accuracy, with which the price reacts with these angles in a time frame of almost twenty years.
After watching the usefulness of the Planetary Angles in the previous example, we could imagine how useful it would be drawing these angles from a high or low price and with different price scales, as if they were the classic Gann Angles. It is at that point that the Planetary Fan Tool, introduced by the last upgrade of Market Analyst, comes to help, and it is nothing but an evolution of both Planetary Angles Task and Gann Angles Tools. The great advantage of the Planetary Fan compared to Gann Angles is that their position, concerning the price, does not change in spite of the time frame used, because the time is related to the position in degrees of the planet employed, which does not change whether you are using a daily, weekly or monthly chart.
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Figure 2:
In Figure 3, we can see the same Chart but with a weekly time frame. As mentioned, the great advantage of using the Planetary Angles compared to Gann Angles is that the support and resistance levels are always in the same points regardless of the time frame used, as for each date, the planet position is univocal and unchangeable.
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We can make the same observation on the daily Chart in Figure 4:
For this Index we used Planet Jupiter because the Italian Stock Market has proven to be in sound relationship with it, over time.
About Mariano La Rosa
It is clear that any activity listed that you want to use needs a specific study to test the reliability of each planet in order to apply the one which fits better.
Mariano La Rosa is one of the first traders in the world for certified performance of managed portfolios. He acts as an expert trader in Futures and Options collecting a series of successful results in the accurate forecasting about the Dow Jones movements and about euro/dollar swaps, as widely recognized by the financial press and by Class CNBC television. Graduated in Economics, researcher and student of the known W. D. Gann Theory, he acquired experience in advanced technical analysis and in cyclical analysis of the financial markets, for over twenty years. He is the editor of the International series Trading and Finance published by the publishing house Le Fonti. He is also the editor of several editions of books about the Financial Trading and hes also mentioned in the book Italian Top Trader.
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The Educated Analyst Nov-Dec 2009

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A Free Technical Analysis E Magazine for Traders of Financial Markets

Volume 1, Issue 2 NOV / DEC 2009

Inside this issue...

25 TRADING BETWEEN THE LINES 5 BLENDING MARKET REALITIES WITH

32 DO TRADING ROBOTS HAVE ANY ROLE

9 2019 - THE NEXT GREAT DEPRESSION

34 ON THE COUCH WITH CHRIS SHEA

13 THE PROS AND CONS OF BUY-WRITE

39 THE POWER OF BAR SPLITS & DOJI

43 TRADING PATTERNS - PART 2

23 SO...YOU WANT TO BE A FULL TIME

51 THE PLANETARY FAN

The Educated Analyst |

NOV /DEC 2009

NOV / DEC 2009 - VOLUME 1 Issue 2

All the best!

Mathew Verdouw Editor The Educated Analyst

The Educated Analyst |

NOV /DEC 2009

ADVANCED TOOLS FOR ADVANCED TRADERS

Invest in the innovations of the next generation of Technical Analysis!

INTERNATIONAL: (all countries) +61 7 3118 9580

BLENDING MARKET REALITIES

The Educated Analyst |

Blending Market Realities with Forecasts

NOV /DEC 2009

The Educated Analyst |

Blending Market Realities with Forecasts

NOV /DEC 2009

The Educated Analyst |

Blending Market Realities with Forecasts

NOV /DEC 2009

2019: THE NEXT GREAT DEPRESSION

Source: Market Analyst 6 (www.Market-Analyst.com)

The Educated Analyst |

2019: The Next Great Depression

Source: Market Analyst 6 (www.Market-Analyst.com)

The Educated Analyst |

2019: The Next Great Depression

The Educated Analyst |

2019: The Next Great Depression

The Educated Analyst |

2019: The Next Great Depression

THE PROS AND CONS OF

With Marcus Addison

The Educated Analyst |

The Pros and Cons of Buy-Write Strategies

The Educated Analyst |

The Pros and Cons of Buy-Write Strategies

The Educated Analyst |

The Pros and Cons of Buy-Write Strategies

The Educated Analyst |

The Pros and Cons of Buy-Write Strategies

THE SEQUENTIAL EXHAUSTION INDICATOR

Source: Market Analyst 6 (www.Market-Analyst.com)

The Educated Analyst |

Introduction to the Sequential Exhaustion Indicator

NOV /DEC 2009

Source: Market Analyst 6 (www.Market-Analyst.com)

Source: Market Analyst 6 (www.Market-Analyst.com)

The Educated Analyst |

Introduction to the Sequential Exhaustion Indicator

NOV /DEC 2009