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Technically Speaking, April 2011

Letter from the Editor

We’re featuring a couple longer articles this month, which we think fit well in our newsletter. George Rahal takes a detailed look at quantifying potential rewards relative to risk, an important trading consideration. His contribution is well written and understandable to the novice trading system developer while offering new insights to veteran programmers. Andy Ratkai, CFA, recently prepared a report for his clients that brought together several interesting macro insights. In a way, he ties wave analysis into behavioral finance and raises a number of thought-provoking ideas. Buff Dormeier, CMT, continues to share high quality research on methods for applying volume to market analysis. He recently released a book which adds to the Body of Knowledge of Technical Analysis while offering actionable guidance for traders. It’s also that rare book which is interesting and a fun read. Although we never make guarantees in our profession, I am confident that I could guarantee everyone will learn something form this book as Buff combines historical stories with new techniques. Next month, many members will gather

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What's Inside...

Revising the Reward-Risk Ratio

by George Rahal

Reward-Risk is a term for the ratio of the potential profit to the potential loss of a trade. In using such analysis, the entry price and the prices at which profits or losses will be taken are...

Social Values and Political Fragmentation: Right on Schedule

by Andre Ratkai, CFA

Note: The Long Wave and Social Values help to explain to me (and hopefully others) the current political fractiousness, rise of Tea Party, etc. It’s just a view of the world today, rather than the...

Investing With Volume Analysis: Identify, Follow, and Profit From Trends by Buff Dormeier, CMT

by Buff Dormeier, CMT & Michael Carr, CMT

Recognized with the Dow Award for his 2006 paper on volume, Buff is already a recognized expert on the subject. In that paper, he introduced the Volume Confirmation Price Indicator (VCPI). With this...

Portfolio Simulation to Optimize Trading Systems

by Rick J. Martin, CMT, CAIA, CFP

On May 19, 2006, Rick made a presentation as part of the MTA Education Seminar. It is available in the On Demand Video Archives. The presentation is another example of the timeless value of the...

Interview with Jason Meshnick, CMT

by Jason Meshnick, CMT & Amber Hestla-Barnhart

How would you describe your job? I create web-based investment research tools and reports for investors. I work for the Wall Street On Demand division of Markit, which designs, builds, and hosts...

MTA Announcements

Board Elections Underway – Vote Now! Members, Honorary Members and Emeritus Members, please note the following: Online proxy voting for the upcoming election of MTA At-Large Board positions (3)...

Revising the Reward-Risk Ratio

Revising the Reward-Risk Ratio

Reward-Risk is a term for the ratio of the potential profit to the potential loss of a trade. In using such analysis, the entry price and the prices at which profits or losses will be taken are predetermined Measuring the units of reward per risk in advance aids in deciding whether to enter a position. However, since the outcome of a trade is uncertain, this widely known and used measurement must be revised in order to account for the probability of the trade’s success or failure, which can be done through expected value.

In expected value, a set of future values, or payouts, are adjusted to reflect the probability that each will materialize. For a stock, given a $10 entry with a profit target of $16 and a stop-loss at $8, the reward-risk is $6 to $2, a 3:1 relationship; these are the set of future values.

Additionally, say the probability of

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Not a member? Join the CMT Association and unlock access to hundreds of hours of written and video technical analysis content, including the Journal of Technical Analysis and the Video Archives. Learn more about Membership here.

Contributor(s)

George Rahal

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Social Values and Political Fragmentation: Right on Schedule

Social Values and Political Fragmentation: Right on Schedule

Note: The Long Wave and Social Values help to explain to me (and hopefully others) the current political fractiousness, rise of Tea Party, etc. It’s just a view of the world today, rather than the basis of our investment management process. Our day-to-day portfolio decisions are based on a whole different set of parameters than the Long Wave.

Lost in the daily cacophony of 24-hour news, instantly politicized media scrutiny, and fashion models posing as financial analysts is the truly long-term view of how our society has gotten to where it is today. This isn’t referring to the typical 3-year “long-term” of Wall Street, but a very long-term view that encompasses the balance that must occur to survive.

If you think about it, any political or economic system that survives over the long-term must have ebbs and flows because they rebalance the system. No economic sector can indefinitely grow much faster than

To view this content you must be an active member of the CMT Association.
Not a member? Join the CMT Association and unlock access to hundreds of hours of written and video technical analysis content, including the Journal of Technical Analysis and the Video Archives. Learn more about Membership here.

Contributor(s)

Andre Ratkai, CFA

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Investing With Volume Analysis: Identify, Follow, and Profit From Trends by Buff Dormeier, CMT

Investing With Volume Analysis: Identify, Follow, and Profit From Trends by Buff Dormeier, CMT

Recognized with the Dow Award for his 2006 paper on volume, Buff is already a recognized expert on the subject. In that paper, he introduced the Volume Confirmation Price Indicator (VCPI). With this book, he furthers not only his reputation as probably the foremost expert on the subject but he also demonstrates that he is a talented story teller as he makes the history of technical analysis come alive for readers.

If we are perfectly honest, at least in my opinion, too many technical analysis books devote their first few chapters to the basics of technical analysis with a few comments on its historical perspective. I usually barely skim these sections because I’ve already read the story several dozen times and wonder why it needs to be repeated. Buff tells it differently, starting in the beginning with examples from Biblical times and moving forward through time to draw on Wyckoff and

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Not a member? Join the CMT Association and unlock access to hundreds of hours of written and video technical analysis content, including the Journal of Technical Analysis and the Video Archives. Learn more about Membership here.

Contributor(s)

Buff Dormeier, CMT

Michael Carr, CMT

Michael Carr, CMT

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Portfolio Simulation to Optimize Trading Systems

Portfolio Simulation to Optimize Trading Systems

On May 19, 2006, Rick made a presentation as part of the MTA Education Seminar. It is available in the On Demand Video Archives. The presentation is another example of the timeless value of the material presented in MTA meetings.

Modeling is a basic technique used by many technicians. It usually involves back testing an idea against a security and finding parameters that deliver optimal, or at least acceptable, performance when considering the tradeoff between risk and reward. Rick tackled this subject with some unique and potentially profitable insights. He began by reviewing four commonly seen trading myths.

All too often, even the most experienced technicians will spot something that looks too good to be true. Rick envisions their reaction to be, “I have found the holy grail of indicators. They work great when I overlay them on a chart.” He points out that while the indicator may look good in a

To view this content you must be an active member of the CMT Association.
Not a member? Join the CMT Association and unlock access to hundreds of hours of written and video technical analysis content, including the Journal of Technical Analysis and the Video Archives. Learn more about Membership here.

Contributor(s)

Rick J. Martin, CMT, CAIA, CFP

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Interview with Jason Meshnick, CMT

Interview with Jason Meshnick, CMT

How would you describe your job?

I create web-based investment research tools and reports for investors. I work for the Wall Street On Demand division of Markit, which designs, builds, and hosts websites for retail brokers, major financial institutions, and media outlets worldwide. Our work is designed to seamlessly integrate into our client’s sites, so even though you’ve probably been on our web pages, it’s unlikely that you would know it. One of my key roles involves building models using our SmartText technology to publish dynamically generated commentary on various asset classes and markets. For example, I’ve built several models that read the trend and momentum of a security and return an easy to understand analysis of the technical condition of that security. My number one goal is to make technical analysis more approachable to individual investors. As they learn the correct ways to use the tools, they’ll become more successful

To view this content you must be an active member of the CMT Association.
Not a member? Join the CMT Association and unlock access to hundreds of hours of written and video technical analysis content, including the Journal of Technical Analysis and the Video Archives. Learn more about Membership here.

Contributor(s)

Jason Meshnick, CMT

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MTA Announcements

MTA Announcements

Board Elections Underway – Vote Now!

Members, Honorary Members and Emeritus Members, please note the following: Online proxy voting for the upcoming election of MTA At-Large Board positions (3) is now underway! If you haven’t voted, you can do so by clicking here.

You will need your MTA Member ID Number to vote. When entering your Member ID Number, please leave out the first four zeros and the last “I”. This will leave you with a five digit ID number. If you have any questions regarding the proxy voting
process, please contact Marie Penza, MTA Director of Member Services, at 646-652-3300. We welcome, and appreciate, your participation!

Spring 2011 CMT Exam Administration – Level 3 Closing Soon

Registration for the Spring 2011 Administration of the CMT Level 3 Exam closes on April 8th, 2011 at 5 PM EST. If you plan to register for the CMT Level 3

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Not a member? Join the CMT Association and unlock access to hundreds of hours of written and video technical analysis content, including the Journal of Technical Analysis and the Video Archives. Learn more about Membership here.

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New Educational Content This Month

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