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Technically Speaking, April 2017

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FORECASTING A VOLATILITY TSUNAMI

by Andrew Thrasher, CMT

ABSTRACT The empirical aim of this paper is motivated by the anecdotal belief among the professional and non-professional investment community, that a “low” reading in the CBOE Volatility Index...

WHY DOES A TRADER NEED EDUCATION?

by Mathew Verdouw, CMT, CFTe

I feel very blessed in my position as the founder and architect of Optuma, that I get to travel the world speaking to traders, analysts, and portfolio managers at all levels. From those who are...

THE MOST OBVIOUS MACRO TRADE EVERYONE SEEMS TO BE IGNORING

by Stephen Duneier

Editor’s note: Stephen Duneier is among the presenters at the Annual Symposium in April.  Below is a reprint of his work from his work at BijaAdvisorsLLC.com. I recently gave a TED Talk...

ALPHANUMERIC FINANCIAL CHARTS

by Richard Brath

Editor’s note: Richard Brath is among the presenters at the Annual Symposium in April. Below is a reprint of his work from his blog at RichardBrath.wordpress.com. Financial charting has long used...

HOW DO STOP-LOSS ORDERS AFFECT TRADING STRATEGY PERFORMANCE

by Tucker Balch, Ph.D. & Anderson Trimm, Ph.D.

Editor’s note: Tucker Balch is among the presenters at the Annual Symposium in April. Below is a reprint of his work from his web site at AugmentedTrader.com. “A stop order is an order placed...

MiFID II SOLUTIONS

by IHS MARKIT

Editor’s note: The Markets in Financial Instruments Directive (MiFID) is the EU legislation that regulates firms who provide services to clients linked to ‘financial instruments’ (shares,...

VISUALIZING THE ANXIETY OF ACTIVE STRATEGIES

by Corey Hoffstein

Editor’s note: Cory Hoffstein is among the presenters at the Annual Symposium in April. This post was originally published at ThinkNewfound.com and is available as a PDF here. Summary • Prospect...

WHY MULTIPLY BY SQRT (252) TO COMPUTE THE SHARP RATIO

by Tucker Balch, Ph.D.

Editor’s note: this article was originally posted at AugmentedTrader.com. This question comes up every time I teach Computational Investing. Here’s my attempt to create the best, (final?) answer...

CHART OF THE MONTH: CDS DATA OFTEN LEADS EQUITY PRICS

by Jason Meshnick, CMT

Since ending 2016 at a price of 72.23, Target shares have broken technical support and dropped by 24%. One quantitative factor that could have helped investors avoid this stock is the credit default...

FORECASTING A VOLATILITY TSUNAMI

FORECASTING A VOLATILITY TSUNAMI

ABSTRACT The empirical aim of this paper is motivated by the anecdotal belief among the professional and non-professional investment community, that a “low” reading in the CBOE Volatility Index (VIX) or large decline alone are ample reasons to believe that volatility will spike in the near future.  While the Volatility Index can be a useful tool for investors and traders, it is often misinterpreted and poorly used. This paper will demonstrate that the dispersion of the Volatility Index acts as a better predictor of its future VIX spikes. INTRODUCTION According to the United Kingdom’s National Oceanography Centre, tsunami waves can be as much as 125 miles in length and have resulted in some of the deadliest natural disasters in history. Fortunately, scientists have discovered warning signs of these massive waves, which are believed to be caused by shifts in the earth’s tectonic plates. One of the visible signs of a forthcoming tsunami is

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Contributor(s)

Andrew Thrasher

Andrew Thrasher, CMT

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WHY DOES A TRADER NEED EDUCATION?

WHY DOES A TRADER NEED EDUCATION?

I feel very blessed in my position as the founder and architect of Optuma, that I get to travel the world speaking to traders, analysts, and portfolio managers at all levels. From those who are taking their first tentative steps in their trading life, to the hardened professional analyst who has experienced all market conditions and is doing very well from their endeavors. In all my conversations with traders and analysts over the last 20 years, I’ve found one critical element separating the winners from the losers. It’s their attitude to personal education and their willingness to invest in it. Those who have done well over the long-term are always the individuals seeking out quality education—those who continue to learn. Those who have not been able to make trading work want a “magical” formula and are unwilling to invest time and energy to get the results. There is always more that

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)

Mathew Verdouw

Mathew Verdouw, CMT, CFTe

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THE MOST OBVIOUS MACRO TRADE EVERYONE SEEMS TO BE IGNORING

THE MOST OBVIOUS MACRO TRADE EVERYONE SEEMS TO BE IGNORING

Editor’s note: Stephen Duneier is among the presenters at the Annual Symposium in April.  Below is a reprint of his work from his work at BijaAdvisorsLLC.com. I recently gave a TED Talk titled, “How to Achieve Your Most Ambitious Goals.” In it, I repeatedly tell the audience that I possess no magical gift of skill or talent. I don’t say it out of humility, but rather because I believe it to be the truth. Listen in on any coaching call or read any of the publications I’ve written and you will discover that very little of what I say could be considered rocket science. In fact, it is all quite obvious. However, if there is something that separates me from the majority, it is that I actually enjoy frolicking in the domain of the obvious, the simple, and the easy to understand and predict. It is my philosophy that everything can

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)

Stephen Duneier

Stephen Duneier

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ALPHANUMERIC FINANCIAL CHARTS

ALPHANUMERIC FINANCIAL CHARTS

Editor’s note: Richard Brath is among the presenters at the Annual Symposium in April. Below is a reprint of his work from his blog at RichardBrath.wordpress.com. Financial charting has long used alphanumerics as point indicators in charts. One of the oldest I can find is Hoyle’s Figure Chart (from The Game in Wall Street and How to Play it Successfully: 1898) which essentially plots individual security prices in a matrix organized by time (horizontally) and price (vertically). This textual representation evolved over the decades. By 1910, Wyckoff (Studies in Tape Reading: 1910) was creating charts where x and y are still time and price, but he was writing down volumes instead of prices, and connecting together subsequent observations with a line. By the 1930’s these had evolved into early point and figure charts, such as can be seen in DeVilliers and Taylor (Devilliers and Taylor on Point and Figure Charting: 1933). Columns use

To view this content you must be an active member of the CMT Association.
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Contributor(s)

Richard Brath

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HOW DO STOP-LOSS ORDERS AFFECT TRADING STRATEGY PERFORMANCE

HOW DO STOP-LOSS ORDERS AFFECT TRADING STRATEGY PERFORMANCE

Editor’s note: Tucker Balch is among the presenters at the Annual Symposium in April. Below is a reprint of his work from his web site at AugmentedTrader.com. “A stop order is an order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit an investor’s loss on a position in a security” —investopedia. In this article, we investigate how the addition of stop-loss orders affect a generic trading strategy.  When investors enter a new position in a stock, they often simultaneously put in an order to exit that position if the price dips to a certain level. The intent being to prevent a substantial loss on that stock if a significant unanticipated negative event occurs. As an example, if we bought a fictitious stock XYZ at $100.00, we might put in a 5% stop-loss order (at $95.00). If the price of XYZ continues

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)

Tucker Balch

Tucker Balch, Ph.D.

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MiFID II SOLUTIONS

MiFID II SOLUTIONS

Editor’s note: The Markets in Financial Instruments Directive (MiFID) is the EU legislation that regulates firms who provide services to clients linked to ‘financial instruments’ (shares, bonds, units in collective investment schemes and derivatives), and the venues where those instruments are traded. MiFID will result in significant changes for the research community. IHS Markit has prepared a white paper explaining the requirements of MiFID and solutions firms can consider to meet those requirements. MiFID II Solutions can be downloaded from their web site for free.  Below are extracts from the paper highlighting the new requirements. A wide-ranging piece of legislation, MiFID II aims to create fairer, safer and more efficient markets through improving investor protection, increasing transparency in OTC markets and changing market structure to encourage more competition. Taken together, the measures of MiFID II affect every part of the securities trading value chain. Investor Protection Under the reforms, new legislation establishes strict rules

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.

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VISUALIZING THE ANXIETY OF ACTIVE STRATEGIES

VISUALIZING THE ANXIETY OF ACTIVE STRATEGIES

Editor’s note: Cory Hoffstein is among the presenters at the Annual Symposium in April. This post was originally published at ThinkNewfound.com and is available as a PDF here. Summary • Prospect theory states that the pain of losses exceeds the pleasure of equivalent gains.  An oft-quoted ratio for this pain-to-pleasure experience is 2-to-1. • Evidence suggests a similar emotional experience is true for relative performance when investors compare their performance to common reference benchmarks. • The anxiety of underperforming can cause investors to abandon approaches before they benefit from the long-term outperformance opportunity. • We plot the “emotional” experience investors might have based upon the active approach they are employing as well as the frequency with which they review results. The more volatile the approach, the greater the emotional drag. • Not surprisingly, diversifying across multiple active approaches can help significantly reduce anxiety. Last week, Longboard Asset Management published blog post titled A Watched Portfolio Never Performs.

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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)

Corey Hoffstein

Corey Hoffstein

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WHY MULTIPLY BY SQRT (252) TO COMPUTE THE SHARP RATIO

WHY MULTIPLY BY SQRT (252) TO COMPUTE THE SHARP RATIO

Editor’s note: this article was originally posted at AugmentedTrader.com. This question comes up every time I teach Computational Investing. Here’s my attempt to create the best, (final?) answer to this question. In my courses I give the students the following equation to use when computing the Sharpe Ratio of a portfolio: Sharpe Ratio = K * (average return – risk free rate) / standard deviation of return Controversy emerges around the value of K. As originally formulated, the Sharpe Ratio is an annual value. We use K as a scaling factor to adjust for the cases when our data is sampled more frequently than annually. So, K = SQRT(12) if we sample monthly, or K = SQRT(252) if we sample the portfolio on every trading day. How did we come up with these values for K? Are they correct? Let’s start with the original 1994 paper by William Sharpe: Sharpe’s paper. Here’s how he defines

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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)

Tucker Balch

Tucker Balch, Ph.D.

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CHART OF THE MONTH: CDS DATA OFTEN LEADS EQUITY PRICS

CHART OF THE MONTH: CDS DATA OFTEN LEADS EQUITY PRICS

Since ending 2016 at a price of 72.23, Target shares have broken technical support and dropped by 24%. One quantitative factor that could have helped investors avoid this stock is the credit default swap spread. CDS spreads indicate the market’s perception of a company’s creditworthiness.  As spreads rise, credit quality is thought to deteriorate. In the case of Target, the rise in spreads from a low of 22 last March to the February 2017 high of 65 provided an early warning that Target shares were increasing in risk. While there’s currently no inexpensive source for investors to see single name CDS spreads, HIS Markit will soon be launching a report on Yahoo Finance that includes this data, along with a quantitative scoring system. It will also include Markit’s proprietary ETP flows, sector PMI, and short interest data.

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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)

Jason Meshnick, CMT

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New Educational Content This Month

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