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– Page 22
 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 editor@atma-india.net. You can also subscribe to ATMASphere completely free by clicking here.
Sincerely,
Gunjan Duaa

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.

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 ananthmadhav@live.com

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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 Kannan@adventuresindia.co.in.

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 cmqcca@yahoo.ca.

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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