atma sphere april 2014 (1)

CONTENTS

Letter from the President - Page 3

Editor’s note - Page 4

Time neutral analysis : where time stops in real time (Renko) by Ananth Madhav - Page 5

Introduction to the Alligator Trading System by Kannan Lakshamraju - Page 8

Why do losers lose by Nikhil Dogra – Page 10

Market Perspective Using Gann Angles by Sahil Vijay – Page 13

Systematic Trading Series by Subhadip Nandy - Part 1 - Page 17

Dow Award series paper review – Analyzing gaps for Profitable Strategies by Claudia Mincucci - Page 19

Past and Future Events’ Update– 2

Past and Future Webinar Updates – Page 23

This newsletter is produced by the Association of Technical Market Analysts. All comments and editorial material do not necessarily reflect the organization's opinion nor

does it constitute an endorsement by the Association of Technical Market Analysts or any of its officers, of any products or services mentioned. Sources are believed to be

reliable at time of publication, but not guaranteed. The Association of Technical Market Analysts and its officers, assume no responsibility for errors or omissions.

3 | ATMASPHERE APRIL 2014

LETTER FROM THE PRESIDENT

Dear Colleagues,

Change is the fulcrum upon which all progress rests. Join me in welcoming our new Editor, Mr. Gunjan Duaa, an

existing Board Member of ATMA. A renewed vigour and intensity is what I look forward to in the ongoing

publication of ATMAsphere with Gunjan coming at the helm. Ms. Meghana Malkan has had to step down due to

various reasons.

Ethics is the hallmark of any professional. Regularity, dependability and thus professional respect all originate from adherence to a

commonly accepted Code of Ethics. Worldwide, professional organizations are placing increasing emphasis on developing and

implementing their Codes of Ethics well. ATMA, continues to take the right steps in this direction. Proliferation of Social Media on one hand

has created new marketing and business development opportunities for all, yet on other hand it also brings upon a far greater responsibility

on the shoulders of all professionals. ATMA will in the near future make endeavours to setup tutorials by Social Media Experts for our

membership to appreciate the nuances.

The ATMA Webathon is finally here. 10000 seats over 10 webinars spread out over 10 weeks! Each of the 10 speakers is a leading light on

their subject areas in India. To give back to the society, ATMA is offering 888 seats free at each of these 10 webinars. Do inform all your

friends and colleagues who are interested in Technical Analysis to take benefit of this opportunity.

I do look forward to increasing participation in all the Continued Professional Educational initiatives that ATMA is undertaking. Do reach out

to our Executive Team if you wish to propose a speaker at one of our webinars or monthly meetings and surely in contributing to

ATMAsphere with more articles.

Sincerely,

Sushil Kedia


EDITOR’S NOTE

In this issue -

1. Ananth Madhav explains Japanese Renko Charing style in the Time Neutral chart analysis .

2. Kannan Lakshamraju throws light upon the Alligator Trading System.

3. Nikhil Dogra illustrate the reasons for trading losses, in his article Why do losers lose?

4. Sahil Vijay elucidates Gann Angles in his article on Market Perspective using Gann Angles

5. Subhadip Nandy brings the first part of the 12 part series on Systematic Trading

6. Claudia Mincucci reviews the Dow Award winning paper of 2011 about Analyzing Gaps for profitable strategies.

We await your feedback on ATMASphere. Please let us know what we can do to deliver content that meets your needs by

sending an email to [email protected]. You can also subscribe to ATMASphere completely free by clicking here.

Sincerely,

Gunjan Duaa

mailto:[email protected].

http://www.atma-india.net/20120312540/atma-monthly-newsletters.html


The Time Neutral Analysis: Where

Time stops in Real Time. (RENKO)

In this article I am going to discuss about time neutral charts, as the name

suggests Time Neutral Charts means the plotting of price in such a way

where time is not taken into consideration , the charts discussed do not

have time on X - axis , These can be plotted in Bar , candlesticks , OHLC and

close only line charts where price is plotted on Y Axis and the corresponding

time on X. axis.

Time neutral charting uses only price movement. There are different ways

for calculation and plotting of these charts, the most commonly used are

Renko Charts , Three line Break , Kagi charts , and Point and figure analysis

, all these are time neutral. We are going to discuss each of them

individually in a total of 4 article series followed by a simple trading system

that I use for my own trading based on the Renko charting and analysis style

.

How the charts look like :

What are Renko Charts. Renko charts are price charts with rising and falling

diagonal lines of boxes that are Green and Red in colour (Can also be Hollow

or filled depending on the software settings) .The word "Renko" comes from

"Renga", the Japanese word for "brick". The Green and Red colored squares

that make up a Renko chart are often referred to as "bricks." Renko charts

were popularized by Steve Nison in his book Beyond Candlesticks ). These

Charts in which TIME and VOLUME are not included, are very useful for

traders to Identify Support and Resistance levels

Renko Chart Construction : These charts have a pre-determined "Brick Size"

that is used to determine when new bricks are added to the chart. If prices

move more than the Brick Size above the top (or below the bottom) of the

last brick on the chart, a new brick is added in the next chart column . Green

bricks are added if prices are rising. Red bricks are added if prices are falling.

Only one type of brick can be added per time period. Bricks are always with

their corners touching and no more than one brick may occupy each chart

column. It's important to note that prices may exceed the top (or bottom) of

the current brick. Again, new bricks are only added when prices completely

"fill" the brick.

For Example: For a 10 Point chart, when price moves from 100 to 114 one

green brick is added . Renko charts give the impression that price movement

has stopped at 110 till price touches 120 or 90 no bricks are added. It’s

important to note that Renko charts may not change for several time

periods when specified brick size movement is not there in Price.

http://store.stockcharts.com/products/beyond-candlesticks


Parameters : They are 2 ways to specifty the size of Renko Bricks . Absolute

Points and Average True Range. With the "Absolute Points" method, you

specify the size of each brick on the chart in points. The advantage of this

method is that it is very easy to understand and predict when new bricks will

appear. The disadvantage is that the point value needs to be different for

high priced stocks than for low priced stocks. Typically you will need to

choose a value that is roughly 1/ 10th to 1/20th the average price of the

stock during the time frame you want to chart. The "Average True Range

(ATR)" method uses the value of the ATR indicator to determine the brick

size. The ATR indicator is designed to ignore the normal volatility of a stock

and thus it can "automatically" find good brick sizes regardless of the value

or volatility of the stock selected. ATR with a value of 14 is the default value

for Renko charts in most of the softwares.

Signals : Color Change is the Basic Buy / Sell Signal. Some people use 2 to 3

Bricks of same colour as the signal to avoid whipsaws and confirmation of

the Trend .

Let’s look at Banknifty Chart from start of February 2014 in Candlesticks and

RENKO . Readers can observe themselves how Renko Charts filter out Noise.

Stop loss for all trades can be 3 bricks below the entry point of the average

of the 3 bricks as a trailing stop loss after the price starts moving towards the

trend.

So this way we can see that Renko can be used by any kind of traders , but is

mainly helpful for trend followers and swing traders , As any other system of

trading , Renko shouldn’t be used alone but with other indicators for

confluence of signals for better analysis and a better winning probability.

______________________________________________________________

Ananth Madhav, a CMT aspirant, is a full time

trader having 6 years of experience, teaches

TA and is a member of ATMA – Hyderabad ,

which is to be launched shortly. You can

reach him on [email protected]


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The Alligator Indicator

The markets are Non Parametric and Random and generate trends on

an average of 20%-30%. Most of the money is made by following price

trends. There are many trading systems developed for Identifying market

trends and Alligator Indicator is one of them. It is a unique trading system

using moving averages and was developed by Bill Williams in 1995.

Since Alligator indicator is developed using moving averages It is a

lagging indicator used to identify price trends. The Alligator system should

not be used alone for taking trading decisions but should be used with

Fractals, AO, AC or other momentum indicators. In this article I will explain

the alligator Indicator.

The aim of the alligator Indicator is to identify the price trend by using a

combination of three smoothed moving averages .The three moving averages

are in Blue, Red and Blue color (market in the image below). The blue line is

known as the “jaw” of the alligator, it is usually the line on the top in a

downtrend and vice versa for the uptrend. The red line is known as the “teeth”

of the alligator because it is between the jaw and the lips of the alligator.

Lastly, we have the green line that represents the “lips” of the alligator, this

line is at the top in the uptrend and at the bottom in the downtrend. The

Alligator indicator is metaphoric because it represents the mouth of an

alligator. Sleeping period will give a way to the hunting period. The longer it

sleeps the hungrier it become therefore a stronger momentum will be in the

markets. The concept is about consolidation and breakout , the longer the

alligator sleep, means the longer the market is consolidating and after a long

consolidation the breakout is usually bigger.

These three line for the Alligator’s mouth: green – lips; red – teeth; blue –

jaws

Alligator Formula

The Alligator indicator's calculation formula sequence involves the following

steps:

1. The Alligator’s Jaw, the “Blue” line, is a 13-period Smoothed

Moving Average of Median line , moved into the future by 8 bars;

2. The Alligator’s Teeth, the “Red” line, is an 8-period Smoothed

Moving Average of Median line, moved by 5 bars into the future;

3. The Alligator’s Lips, the “Green” line, is a 5-period Smoothed

Moving Average of Median line, moved by 3 bars into the future.

How to Calculate

MEDIAN PRICE = (HIGH + LOW) / 2

ALLIGATORS JAW = SMMA (MEDIAN PRICE, 13, 8)

ALLIGATORS TEETH = SMMA (MEDIAN PRICE, 8, 5)

ALLIGATORS LIPS = SMMA (MEDIAN PRICE, 5, 3)

SMMA (Smoothed Moving Average)

The first value for the Smoothed Moving Average is calculated as a

Simple Moving Average (SMA):


SUM1=SUM (CLOSE, N)

SMMA1 = SUM1/ N

The second and subsequent moving averages are calculated according

to this formula:

SMMA (i) = (SUM1 – SMMA1+CLOSE (i))/ N

Where:

SUM1 – is the total sum of closing prices for N periods;

SMMA1 – is the smoothed moving average of the first bar;

SMMA (i) – is the smoothed moving average of the current bar (except

the first one);

CLOSE (i) – is the current closing price;

N – is the smoothing period.

How to use the Alligator

When the Jaw, the Teeth and the Lips are closed the Alligator is going to

sleep or it is sleeping already. As it sleeps, it gets hungry the longer it sleeps,

the hungrier it is when it wakes up. Therefore , more distant averages indicate

sooner price movement. If the averages go on in an upward direction (green

followed by red and blue) this shows an emerging uptrend interpreted as a

signal to buy. On the other hand if the averages follow each other in the

reversed order down the slope (blue followed by red and green) this indicates

a signal unfolding downtrend. This means that it would be quite appropriate

to sell at that point.

Once again, like all moving averages based indicators, Alligator is a

lagging indicator. Therefore, it may generate false or late entry / exit signal

leading to partial profits / loses. A combination with other oscillators,

momentum indicators is must to reduce false / insignificant signals. Using

Fractals (another indicator by Bill Williams) with other momentum indicators

like AO and AC form a better trading system compared to the Alligator alone.

I will look deeper into the Alligator Indicator on different timeframes

combining Fractals and some momentum indicators in forthcoming articles.

Kannan Lakshmanaraju is currently working as a Research Analyst in AdVentures IndiA Financial Services Limited. He is the founder of the website www.chartslive.com , a free global Technical Charting portal. He is currently developing trading Strategies for various technical charting softwares. He can be reached at [email protected].


Why Do Losers Loose?

The ‘disposition effect’ is the tendency to sell assets that have

gained value (‘winners’) and keep assets that have lost value

(‘losers’) which has given us the most quoted market wisdom “cut

your losers short, let your winners run”. So, presumably all the

losers do the opposite right? Wrong! The average participant

(includes both retail and novice traders) do exactly what they are

‘supposed’ to do when they are trading. But, once they either have

two winners in a row, or two losers in a row they change themselves

into a gambling beast. This beast soon indulges in disposition &

when this effect takes over; the participant increases the amount

per trade along with modified risk parameters. In simple layman’s

terms, the average market participant has a small risk to a large

reward until the person wins or loses a few trades, and then the

participant ramps up their position size, and let their losers run. In

itself, this is useful information & next time you win twice or lose

twice it should raise a warning flag – the statistics say “you’re about

to do something stupid”.

Market participants entries/exits are largely made from time & price

alonewhich might seem like a pretty bland observation, but to my

mind it’s the most important.

Retail participant’s love ranges and don’t trade trends and they keep

on banging their heads against the wall by trading against the trend,

but eventually does roll over and join in, but in doing so they easily

provide liquidity to the professionals who are looking to cash-in. Of

course, if you add it to the disposition effect then there’s every

chance they’re leveraged up to the hilt too.What we’re really talking

about here is weak money, and so to be clear, it’s not retailers that

are moving or finishing a trend, or providing liquidity. They are just

indicative of weak money. In reality, they will be replaced in the

wider market with poorly performing hedge funds, companies

hedging at extremes of price thinking that they are ‘managing their

risk’ when really they’re performing a breakout trade at the end of

the trend, and novice traders who have an unfeasibly large bank roll.

Of all the advice I’ve ever read, or followed, this was the most

useless - most simple systems are profitable if you follow the rules.

Maybe I’ve missed a golden age of trading when a simple MA

crossover could make you rich beyond your wildest

dreams.Discovering anything even resembling a useful edge is a long

slog of research, experiment, test, outcome, dead end and start

again, for literally thousands of hours. Sure, the outcome might be a

simple system, but the time taken to find it is anything but simple.

Novice traders either use a simple oscillator based or a MA

crossover based system with focus on discipline and following the

rules without even testing them.

Water torture of trading is to take a simple system and trade it day

in, day out for months on end. And to get nothing but a slight loss in

the account for the troubles. The implication that you just didn’t

believe enough in yourself, those times when you didn’t follow the

rules was self-sabotage is not only insulting, it’s not true either. Lack

of discipline is the result of conflict between subconscious instinct

and our conscious thoughts. What kind of life is trading if you are

constantly at war with yourself?

So why do losers lose?

- In ranging markets their strategy is as good as random

- In trending markets their strategy is on the wrong side of

the tracks

- And in all markets, they'll let their risk be a function of

their own trading success or failure rather than a function

of market conditions.


Here is a matrix of market participants winning and losing relationships –

Trading is a zero-sum game when measured relative to underlying fundamental values. No trader can profit without another trader losing. People trade because they obtain external benefits from trading. These benefits include expected returns from holding securities, risk reduction from holding correlated assets and gambling entertainment


Source: Lawrence Harris, "The Winners and Losers of the Zero-Sum Game:

The Origins of Trading Profits, Price Efficiency and Market Liquidity"

Trade well!

Nikhil Dogra is a Chartered Market Technician Level 2 Candidate and a developing proprietary trader executing systematic discretionary trades across commodities futures for more than 3 years. He was successful in generating alpha for his fund management client.


MARKET PERSPECTIVE USING GANN ANGLES

Financial Markets have caught fantasies of millions; some made their

fortunes and other lost big time. Market wizards have advocated discipline,

risk management, professional trading set-up but yet emotions of fear and

greed overcome human behavior. Investment or trading is one of the most

thrilling, satisfying, rewarding and yet most challenging and demanding

profession. There are various approaches, school of thought, trading styles

and yet market is such a beast that sooner or later it gets one and all, caught

on the wrong side. The longer one can survive in the markets, the better are

the chances to succeed. It’s a marathon which demands patience, discipline,

clarity of thought and vision, humility, precision and strong will to follow the

trading system put in place. There are very few approaches or so called

experts who could give you as precise, scientific and exact ways to establish

a trading platform which gives optimum risk management as Mr. W. D

Gann’s. According to Gann, the way to make big money is by holding on to

your right calls long enough (as long as the trend continues) and exiting

wrong calls at the earliest by booking marginal losses. No trade should be

initiated without a precise stop loss order and that too one which is

scientifically (mathematically) driven. I am trying to pay tribute to one of the

greatest traders of all times by depicting a glimpse of one of his ways of

market forecasting using the Gann Angles.

W.D Gann was a mathematician and a humble student of the markets. He

was famous to predict tops and bottoms of stocks, commodities and

currency markets year after year. He believed mathematics is the only exact

science. He believed that markets behave in a perfectly rational and

scientific way. Everything in nature is male and female, white and black,

harmony or in harmony, right and left. The market moves only two ways, up

and down. There are three important points that we can prove with

mathematics or geometry i.e circle, square and triangle. Angles measure and

divide time and price into proportionate parts. There are three dimensions

which we know how to prove- width, length and height. Geometric Angles

were his favored tools to establish trading platform, measure support and

resistance and predict future trend. Geometric angles are used to measure

Space and Time periods because it is quicker method than addition or

multiplication when we draw the angles from tops and bottoms.

Gann was a trader who had his invincible set of trading rules. He treated

investments and trading as a sacred profession and gave it new dimensions.

He used to study the markets past performance as he believed history

repeats itself. W. D Gann was a master of cycle analysis. He used several

different approaches to find confluence between price, time and diagonal

analysis.

Gann believed in keeping charts of yearly, weekly and daily (high and low)

prices to analyze the markets. He believed weekly charts are the most

important ones to analyze markets and determine trend and in very active

markets he advocated to keep daily chart as well. I am going to focus

primarily on weekly charts to show the strength of Gann Fan or Angles in

analyzing and trading the markets.

The Gann Fan or angles are in itself a trading and analysis system. It

comprises of four angles above and four angle below the all important 45°

angle. The 45° angle is the most important because it divides the space and

time in two equal parts.

The Angles measure and divide time and price into proportionate parts. The

most important angles as per Gann are: 3.75, 7.5, 15, 18.75,25.25, 30, 37.5,

45, 52.5, 56.25, 60, 63.75, 71.25, 75, 82.5, 86.25, and 90 degrees.

Most Important Geometrical Angle: 45° or 1x1 : The first and always the

most important angle to draw is 45°angle that moves up one point per day,

per week, per month. This is a 45° angle because it divides the space and

time in two equal parts. As long as the market or a stock stays above the 45°

angle, it is in a strong position and indicates higher prices.


Second important Angle: The next important angle is 2x1 which moves up at

the rate of 2 points per day, week or month. It divides the space between

the 45° angle and the vertical angle into two equal parts and measure 63.75°

angle. It is an acute angle than the 45° angle so as long as the stock stays

above this angle, it is in a stronger position than the 45° angle. When a stock

breaks below this angle, then expect it to correct to 45° angle and take

support there.

Third important Angle: 4x1 is the next and still stronger angle which moves

up at the rate of 4 points per day, week or month. It measure 75° and

divides the space between the angle of 2x1 and the 90° angle into two equal

parts. Any stock or market which continues to trade above this angle is in a

very strong position and once it is breached then expect a correction to 2x1

angle.

Fourth Important Angle: 8x1 is the next angle which depicts 8 points up

move to every one unit move in time. This angle measure 82.5°. This is a

very acute angle and stocks holding above it are in sharp up move.

Fifth Important Angle: 16x1 is the severe most angle which measure 86.25°

angle. This angle depicts 16 points up move for every one unit move in time.

This is the most acute angle and stocks seldom stay above them for too long.

But, as long as they stay above them, they depict sharpest rallies.

Rule: As a trading rule, No matter what angle the stock or market breaks

under, it indicates a decline to the next angle below it.

First Angle below the 45° angle: 2x1 is the first angle below the 45° which

depicts half a point movement every unit of time and measure 26.25° angle.

This is the first support when the stock or the market breaks down from 45°

angle. As a general rule, this angle provides good support when reached.

Second Important Angle: 4x1 is the next important angle on the bear side of

the square which moves at the rate of ¼ points every single unit of time. This

is the next support below the 2x1 line or 26.25° angle.

Third Important Angle: 8x1 is the next which measure 1/8 points movement

every unit of time and measure 7.5° angle. This is a good support zone after

a stock or market has a long and prolonged fall. The stock might rest on this

line or angle and take support and re start its upward journey from there.

Fourth Important Angle: 16x1 is the next important angle which depicts

1/16th point movement every single unit of time and measure 3.75° angle.

This angle can be used in monthly charts after a stock has witnessed long

sustained downtrend and can take support and start its next up move.

The Gann Angles should be drawn from major tops and bottoms to find next

support and resistance zones as well as to analyze the pace of the market

move which one should expect next. The division of time, price and space

gives this tool great precision to depict major market moves. Gann

advocated drawing these angels from major tops and bottoms as well as

from secondary and third tops and bottoms. When these geometric angles

drawn from different tops and bottoms cut each other, it provides critical

points to watch out for change in trend because time and price square out at

these times and price levels.

I am making use of weekly charts of some of the Indian stock market indices

to depict how markets have held the support and resistances provided Gann

Angles. At the outset, I must state that it is not the only set of tools that

Gann used or advised to use but it is one of the most important tools that

Gann used. We can ourselves look at the abundance of information that

these depict and they can really be very handy to include in our trading and

analysis.

CNX NIFTY: The first chart I am taking up is the weekly chart of CNX NIFTY.


What I have simply done is drawn Gann Fan or Angles from the all important

bottom of 2252 of 31-10-2008. I have circled the areas where Nifty has

encountered support or resistance going along on these angles. You can see

quite a few of the tops and bottoms are forms on these angles. I must say do

not expect every top or bottom to be on these angles but these are the

pressure points both price and time wise to get cautious as they can lead to

change in trend. The most import and recent is to look at the 8x1 line which

is providing support to Nifty since December 2011.

CNX BANK NIFTY

The next chart I have taken up is the CNX BANK NIFTY (weekly). Here again, I

have drawn Gann Fan from the 3314 low of 13-03-2009. I have drawn circles

to depict points where the Bank Nifty took support and resistance on Gann

Angles. This chart too depicts that Gann Angles have been providing support

and resistance on numerous occasions. The sharp fall on August took

support exactly on 8x1 line.

Now, I am taking CNX NIFTY daily chart with only 45° angles (the most

important gann angle because it divides the space and time in two equal

parts) from major tops and bottoms to analyze the market moves.


I have drawn 45° angle from the 2008 Nifty top of 6357. The down trend

continued and this line kept providing resistance till it broke in March 2009.

Once broken, the downtrend changed to uptrend. Then I drew 45° angle line

from the 2008 October bottom of 2252. The market maintained its uptrend

till it stayed above this line. Once the trend turned again to downtrend, this

support line became resistance line which is clearly depicted by April 2011

top just below 6000. Interestingly, this was the area around which upward

rising 45° angle from October 2008 low of 2252 and downward trending 45°

from November 2010 top of 6335 intersected which alarmed change in

trend and it turned the uptrend to downtrend. Such pressure points are

always to be curiously watched by to witness important trend changes. Since

then the market has been in trading range. The main trend is up as the

market is making higher tops and bottoms but the pace of the rise is not

swift enough to beat the 45° angle or in other words the rise is not per unit

in price per one unit of time. For further analysis part 2x1 line or 26.25°

angle might be more accurate but I have used this chart only for academic

purposes to highlight the importance of Gann Angles.

To conclude my humble effort of highlighting the priceless techniques of

W.D Gann, I would like to state what Gann believed i.e Every movement in

the market is the result of a natural law of vibration and of a cause which

exists before the effect takes place and can be determined in advance by

studying the past market behavior as History repeats itself. All in all,

Investment and trading decisions have to be based on sound principles and

strategies. One can benefit manifold if one incorporates words of wisdom

from the wizards. And one such pearl from the dictionary of W.D Gann is:

Never decide the main trend has changed one way or the other without

consulting your (Gann) angles from top or bottom and without considering

the position we are in, in the cycle of the specific stock or market.

Sahil Vijay,CMT is in the financial markets for the last nine years and

currently working as a Treasury Analyst with Capital Bank. A Banker by

profession he is looking after Investment and takes trading decision in

Debt, Equity and Foreign Exchange markets . He uses Elliot Wave Theory,

Gann Studies, Bollinger Bands, Fibonacci Analysis and Momentum

Oscillators like RSI to drive confluence points in various markets to

establish low risk –high yield set ups, he also include inter market analysis

and global indices in my study to draw better understanding of the under

currents in global financial markets.


An introduction to systematic trading

Systematic trading refers to the process of buying and selling financial

instruments, such as stocks, futures, currencies or commodities, using a

predesigned and backtested trading strategy called a trading system. Most

trading systems are developed using some form of analysis which tracks

either price or volume or both, i.e, using technical analysis though there are

some systems which use fundamental analysis. The opposite of systematic

trading is called discretionary trading, in which the trader makes buy and sell

decisions on a trade-by-trade basis. Normally the sole job of the systems

trader is to follow his system in total, while the discretionary trade may alter

or choose his strategy depending his analysis about the state of the market.

One of the most significant benefits of systematic trading is that it helps to

avoid the classical psychological errors inherent in any human decision

making: to hang on to losing positions hoping they will turn favorable, to

open positions out of boredom or desperation even when the analysis

parameters are not met etc. Systematic trading removes emotional decision

making from the trading process. When real money is at risk through actual

trades in the markets, the rollercoaster of fear and greed can easily

overwhelm rational decision making. A trading system does not have any

emotions and hence the decisions are objective and in line with the strategy.

Because systematic trading strategies are typically written in specific rule

set, they can be tested on historical data. This ability to back-test a trading

strategy with the same rule set is one of the biggest benefits of systematic

trading. Back-testing tells you how well the strategy would have done in the

past. While back-tested performance doesn’t guarantee future results, it can

be very helpful when evaluating the performance of potential strategies. The

back-tested results can be used to eliminate strategies that either don’t suit

your trading style or are not likely to meet your performance goals.

Traders new to systematic trading often question whether the systematic

approach can be profitable. They sometimes believe that discretionary

strategies using different indicators/strategies as and when required can be

better in the long-term. The reality is that professional traders, such as

hedge funds , prop traders and HNIs, have been trading their own and

customers’ money profitably for many years using trading systems. These

professionals, whose trading records are audited and who survive on their

trading profits, have demonstrated for decades that systematic trading can

be profitable.

One of the most famous examples of systematic trading are the Turtles. A

bunch of ordinary people with almost no background of trading were taught

in two weeks a set of rules on which to trade. Following those simple rules,

they went on to make millions for themselves and their clients resulting their

names being part of the market folklore. A lesser known story is that Paul

Samuelson, the third economist to win the Nobel prize who was also an

investor and board member of Commodities Corporation, one of the first

hedge funds to follow systematic trading through a specific rule set using

computers for analysis of models way back in 1971. Ironically, Commodities

Corporation almost went broke ( capital dropped from $2.5 million to

$900,00) in 1971 following models based on fundamental analysis of

commodities. In 1971, Frank Vannerson joined Commodities Corp with his

own model which he developed after studying historical data of 15

commodities. The study took him one year !! Based on his studies and

backed by Samuelson, Vannerson designed a computerized trading system

which in essence was a trend following system, i.e, prices continue to go

upward once a trend has been established . He named it Technical

Computer System or TCS for short. TCS was the first in a long line


of trading systems later developed by the hedge fund industry

Despite the benefits of systematic trading, there are risks as well. The

primary risk starts at the design phase of a trading system. A trading system

can be poorly designed for several reasons, including being curve fitted to

the market, being based on unrealistic assumptions, or using poor or no

money management. If you choose to design your own system, you need to

have knowledge of the market you want the system to trade as well as

strategy building techniques. If you decide to purchase a system, the primary

challenge is evaluating potential strategies and selecting the best one based

on your trading preferences and performance goals based upon realistic

assumptions.

Lastly, no trading system remains profitable forever, due to changing

characteristics of the market, even the best trading strategy can stop

working . Sometimes, a small modification to the system, such as changing a

parameter or basic indicator might solve the problem. However, even if the

system is technically robust, it's always advisable to track its performance

and be prepared to stop trading it if it stops working.

In the next part of this series, we will discuss the basics of system design.

Subhadip Nandy graduated with Economics with post grad in Business

Management. He has 12+ years experience as a trader and analyst. He was

the Head-Research and Director-Algorithmic Strategies for one of the

biggest commodities prop firms in India. He now manages his own and

prop money based upon self developed algorithmic strategies.

www.quantgym.com


Dow Award series Paper Review – Analyzing

Gaps for Profitable Strategies

The Charles H. Dow Award is a recognition for excellence and creativity in

technical analysis annually attributed by the Market Technicians Association.

Every month I will review a paper that received the Dow Award, helping

readers make use of the strategies and research their own with help from

these classic works.

The research is about a substantive topic (indicators, strategy or system)

based upon the concepts of technical analysis. The paper include data that

covers at least one full market cycle and it must be back-tested with

statistical methods. The analysis and conclusions obtained search to be

useful to enhance the understanding of market action.

The presentation in this edition is

Dow Award 2011 – Analyzing gaps for profitable strategies

By J. Dahalquist Ph.D. CMT and R. Bauer Jr, Ph.D. CFA, CMT.

This study was centered on the following characteristics:

Criterion of stock selection: Stocks included on Russell 3000 index that

have trading volume over one million shares on gap day and the four

prior trading days.

Period of research data: From January 1, 2006 to December 31, 2010.

(1,259 trading days).

Sample: 20,611 gaps up and 17,435 gaps down (on daily basis this is an

average of 16.4 gaps up and 13.8 gaps down).

Construction of the tables

It displays average data returns for 1 day, 3 days, 5 days and 20 days

after the gap day. calculated from the open of first day after the gap to

the close of last day holding.

The return is calculated for stocks, SPY and market adjusted for each

period of time mentioned.

GAPS UP - Analysis of returns by holding:

In this study, gaps up shows to outperform the market over the next

several weeks

Also it is shown that the return will be positive and higher than the

market return if positions are held for 5 days or 20 days.


Strategies tested for returns for gaps up and gaps down:

1) Importance of the candle color on gap day:

Study suggest that if stocks who gaps up and close on a white candle,

upward price trend will continue for the next few days.

On the contrary stocks that close with a black candle on gap day tend to

have negative returns and underperform the market over the next

several days.

2) What happen if considered the Candle color on day before gap and gap

day?

The best combination for above market returns where found when the

stock closed with a black candle the day before gap and a white candle

in gap day.

3) Size of the gap matters.

Measuring the percentage change of price on each stock of entire

sample and broke them in quintiles, which the 5th is the higher.

Authors found that returns for those stocks who close with a white

candle on the gap day and where included in the 4th quintile are quite

strong.

4) Influence of volume in gap day

Compared the volume of the stock on the gap day to previous short-

time volume, findings suggest that stocks with high volume outperform

those with low volume in a 20 days time frame.

5) And what about 10-day, 30-day and 90-day moving average?

If the gap up occurs below the moving average tend to outperform gaps

up over the MA.

Higher returns were found in shorter MA when compared to longer

ones.

Also authors identify like a breakaway gap, those occurring below a 10-

day MA, specially for those having a white candle on gap day.

GAPS DOWN – Shorting strategy

This paper shows that the stocks gaps down they continue to fall for the

next couple of days, and this fall is on average almost two times greater

than the decline in the overall market on those days.

Also it is noticed that this short-lived downtrend reverses and return

positive price movements in the 5-day and 20-day periods.

So the suggested strategy for the average of the stock is to short after

the gap down and to close position between 3rd and 5th day (regarding

volume note), and considering to go long after.

Candle color of day before and gap day

The shorting strategy is most profitable when a white candle precedes

the gap down day.

And when both days have a white candle, downwards continues to 5th

day.

Gap down size importance

In the fifth quintile, which contains the largest relatives gap sizes, down

price movement is more likely to continue for the first 3 days after the

gap. Also was notice that market adjusted 20-day return was


lower for the 5th quintile (0.8%) than those included en the 4th quintile

(1%).

Volume considerations

While general opinion claims that volume is not an important

consideration in gaps down, this study found that above average

volume is associated to better performance of a short strategy at one-

day and 3-day trading time frames.

A warning for a short strategy for gaps down on light volume which

tends to reverse quickly. This gaps have positive returns from the 3-day

time frame and longer and outperforms the market in the 20-day one.

Gaps down above or below the moving average in a 10, 30 and 90 days

MA.

Stocks that gap down above 10-day MA have the greatest absolute value in a 3-day time period. In the case of prices gaps down above its 30-day or 90-day MA, they tend to outperform the market by over 1.3% in the next 20 days.

Claudia Mincucci is a trader since 2008.Her speciality is trading micro

trends with a Focus on analyzing and trading Stocks, Options, FX, ETFs on a

daily basis on the US and Canadian Stock Indices.

She is a graduate from the University of Buenos Aires , where she studied

Accounting and Business Administration.

She is pursuing her CMT designation and currently lives in Montreal,

Canada. She can be contacted at [email protected].


PAST EVENTS’ UPDATES CHAPTER DATE SPEAKER TOPIC

Kolkata 05-04-2014 Mr. Abhijit Paul Relative Strength: Let

there be Light

Delhi 26-04-2014 Mr. Nilesh Sarda W D Gann Square of 9

for Indian Market

Mumbai 26-04-2014 Mr. Subhadip

Nandy

Building a low risk

high reward Trading

System: The Trend

Breakout System

PAST EVENTS’ UPDATES CHAPTER DATE SPEAKER TOPIC

Indore 18-05-2014 Mr. Anil Singhvi Integrating Elliott Wave

Theory into Technical

Analysis

Bengaluru 25-05-2014 Mr. Kesava

Kumar

Harmonic Patterns


PAST WEBINAR UPDATES

DATE SPEAKER TOPIC

08-03-2014 Ms. Siddhali Desai CMT Tutorial - Level -1 May'14



FUTURE WEBATHON SERIES UPDATES

DATE SPEAKER TOPIC

13-05-2014 Mr. Anil Padia Session 1 : "Ichimoku - Kinko - Hyo"

20-05-2014 Mr. Ashish Kyal Session 2 : "Understanding Neo

Wave - Mastering Elliott Wave"

DATE SPEAKER TOPIC

27-05-2014 Mr. Gnanasekar

Thiagarajan

Session 3: “Capture high probability

trades”

03-06-2014 Mr. Rohit

Srivastava

Session 4: "Elliott Wave and the bull

market: The Psychology of wave

formations"

10-06-2014 Mr. Mitesh

Thacker

Session 5 : "Devising Trend Following

Systems"

17-06-2014 Mr. Hemant Kale Session 6 : "How to Profit from M

pattern and W pattern"

24-06-2014 Mr. Mukul Pal Session 7 : “Overbought or Oversold”

01-07-2014 Dr. Musa R Kaiser Session 8 : "Technical Analysis of

Fundamentals"

08-07-2014 Ms. Sonia Dhall Session 9 : "Day Trading - An

Approach to Consistency"

15-07-2014 Mr. Rishi Kohli Session 10: “Combining Options with

Technical Analysis for Profitable Swing

Trading”


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