PowerZone Trading Blog

A Closer Look at Price Chart Choices

Jean Folger - Wednesday, August 28, 2013

This article appears in the September 2013 issue of Futures magazine.

Price charts are a technical trader’s portal to the markets and a primary means of making trading decisions. Today’s market analysis platforms offer traders a variety of options for viewing price data on a chart, from chart style to interval. The style of the chart determines how price is displayed; for example, bar and candlestick charts. The chart interval dictates which data are used to construct the display. Here, we take a look at popular chart styles and intervals, including time, tick, volume and range bar charts.

Chart styles

While there are many different chart styles, the two most common ways to display prices are bar and candlestick charts. These two styles show the same information: The open, high, low and closing prices for a specified chart interval. Visually, however, bar and candlestick charts are quite different. On a bar chart (also called an OHLC chart), the high and low prices for each specified interval appear as a vertical line, and two, small horizontal lines that represent the bar’s opening and closing prices appear on either side, as shown in the left chart of “Two styles”.

Candlestick charts show the same open, high, low and closing prices with a different display. Here, the opening and closing prices form the body of the candlestick, and the high and low prices for the interval are represented by the wicks — thin lines that appear above and below the body, as shown in the right chart in “Two styles.” The body of the candlestick appears black if the close is lower than the open and white if the close is higher than the open. It’s common for traders to substitute colors for black and white. A green body, for example, means that price closed above its open (showing strength), while a red body often indicates that price closed below the open (showing weakness).

Some traders use candlestick charts to spot price patterns that may indicate a reversal or a weakening of the trend. Patterns can be formed within the same candlestick by comparing the size of the body to the wick, or across several adjacent candlesticks. A bullish engulfing pattern, for example, is a reversal pattern that occurs when the body of an up-candle bar completely covers, or engulfs, the body of the prior bar, signaling the end of a downtrend, as shown in “Time to turn” (below). Candlestick charting often works best when combined with other technical tools or indicators for confirmation. Read more

Unlocking the Mystery of Building Trading Strategies

Jean Folger - Thursday, August 01, 2013

This article appears in the August 2013 issue of Futures magazine.

Traders generally fall into one of two broad categories: Discretionary and systematic. While both groups develop and follow their own trading strategies, the systematic trader typically automates an objective set of trading rules that define exact conditions under which trades will be entered, managed and exited. This also allows him to backtest, optimize and forward-test a strategy before putting it to work in a live market. Through each step of the process, the trader can review a strategy performance report, a compilation of metrics that are based on statistical aspects of the system’s performance. The automation aspect also is a plus for traders looking for more consistent results.

While discretionary traders often use a combination of knowledge and intuition to find trading opportunities, systematic traders develop strategies based on quantifiable specifications. Here, with a focus on systematic trading, we will outline in detail the process of creating a trading strategy that can be measured, tested, optimized and auto-traded.

Indicator vs. strategy

Before we begin, note the distinction between technical indicators and strategies. A technical indicator is a mathematical calculation used to evaluate past and current price and volume activity. Whether available in the public domain (for example moving averages) or developed to perform a specific function, indicators help traders identify market conditions and make predictions about future price movements. However, indicators alone do not generate buy and sell signals.

In contrast, a strategy is a set of objective, absolute rules that defines how and when a trader will pounce. A strategy is composed of three basic parts:

Entry conditions that tell us how to enter a trade. Typically, entry conditions are based on a combination of trade filters, which identify the setup conditions, and trade triggers, the actual condition that prompts a trader to act. Both trade filters and triggers often are based on technical indicators.

Exit conditions that tell us how to get out of a trade. Trade management rules include exits such as profit targets, stop losses and trailing stops, and can be based on dollar values, time, number of price bars, etc.

Position sizing that tells us how much to trade. Position sizing can be based on a fixed number of shares/contracts, a fixed dollar amount or a percentage of capital.

While an indicator is used to evaluate market conditions, a strategy is the playbook that determines how the indicator will be interpreted and applied. Read more

NinjaTrader Welcomes BAR ANALYZER to its 3rd Party Add-On Partner Program

Jean Folger - Wednesday, July 24, 2013

PRESS RELEASE - FOR IMMEDIATE RELEASE

NinjaTrader welcomes BAR ANALYZER to its 3rd Party Add-On Partner Program
Denver, CO, July 16th 2013 – NinjaTrader, LLC is pleased to welcome BAR ANALYZER to its expanding ecosystem of 3rd Party Add-On partners. BAR ANALYZER, a division of PowerZone Trading, LLC has developed high-performance trading software for active traders since 2004.

The main interface for the BAR ANALYZER is a custom designed form that graphically displays real-time market data, and users can apply sophisticated analysis techniques to their charts with one click. Automatic short- and long-term support and resistance levels project onto the price chart, and can be adjusted by clicking and dragging the lines to correspond with specific market depth or volume profile prices. The BAR ANLAYZER works seamlessly with NinjaTrader’s Chart Trader order entry interface, and users can enter trades directly on a price chart while using the BAR ANALYZER to define order placement.

“With its advanced charting and graphics capabilities, NinjaTrader offers the perfect platform for the BAR ANALYZER indicator,” says Lee Leibfarth, President of BAR ANALYZER. “The speed and accuracy of NinjaTrader allows BAR ANALYZER users to visualize the forces inside a price bar in real-time using concepts that include volume profile, market depth, support & resistance, and historical price analysis. We couldn't be more excited to partner with NinjaTrader in offering the BAR ANALYER.”

About NinjaTrader, LLC
Founded in 2003, NinjaTrader, LLC (www.ninjatrader.com) has quickly emerged as a leading developer of high-performance trading software. NinjaTrader is a FREE application for advanced charting, market analytics, system development and trade simulation. Discretionary, end-of day and automated systems traders can trade futures, forex and equities through hundreds of supporting brokerages worldwide. NinjaTrader sets the benchmark for trading software and continues to invest in new product development. Based in Denver, CO, NinjaTrader, LLC serves the global trading community with locations in Chicago, IL, Rotterdam, the Netherlands and Bamberg, Germany.

About BAR ANALYZER
BAR ANALYZER is PowerZone Trading’s newest trading indicator, which enables traders to visualize the forces at work inside a price bar. Price and volume analysis has long been a proven system to trade the markets, and the BAR ANALYZER provides an elegant interface with which to visualize, interpret and react to current price and volume activity. For more information, please visit www.baranalyzer.com.  

Creating Custom Indicators

Jean Folger - Wednesday, May 01, 2013

This article appears in the May 2013 issue of Futures magazine.

A technical indicator is used to provide a distinctive perspective of market activity that may be unavailable by simply viewing price charts. Each indicator is essentially its own program that tells the computer what data to use, which calculations to apply and how to display the results. While there are hundreds of readily available technical indicators, such as moving averages and stochastics, some traders may wish to design their own indicators to perform specific functions or spot unique conditions in the market.

Many of today’s trading platforms enable users to program their own custom indicators using some sort of proprietary language (such as TradeStation’s EasyLanguage or NinjaTrader’s NinjaScript) that interprets the concept for the computer. A list of commands is written in a specific syntax (known as the code), and after the code is entered into the trading platform, it is compiled or verified by the computer. Then it can be displayed as an indicator on a chart.

Here, we introduce a step-by-step process for building a custom indicator, using as an example the Volumizer indicator, designed to evaluate the relationship between average price and average volume. The graphic in “Go with the flow” (right) provides an overview of the development process that we will use.

Define the concept

The idea for a custom indicator can come from fields outside of trading; for example, a trader may wish to apply an idea from mathematics, statistics or simply the result of observation. A trader might notice a specific price or volume tendency, or an intermarket relationship and decide to investigate further. This is critical: It is important to have a specific goal in mind before attempting to develop an indicator, and traders must be able to verbally (and eventually mathematically) express what it is that they want the indicator to do. Read more

How Contango can Affect Commodity ETFs

Jean Folger - Monday, March 04, 2013

This article appears in the March 2013 issue of Futures magazine.

Exchange-traded funds (ETFs) are investment funds that trade on a stock exchange. Like a stock, an ETF’s price changes throughout the trading session as shares are bought and sold, and they can be sold short and bought on margin. In addition, ETFs typically are low-cost compared to other investment vehicles, and are considered a relatively simple way to add diversity to a portfolio. Because of their attractiveness to institutional and individual investors alike, ETFs have grown into a $1 trillion industry since the SPDR fund — the first ETF — was launched 20 years ago.

Today, traders and investors can gain exposure to a variety of investment products through ETFs, including bonds, currencies, indexes and commodities. However, even the relatively simple arena of ETF trading has special considerations that must be acknowledged.

In futures-based commodity ETF trading, if the futures contract in which the ETF invests is experiencing contango, the ETF can lose value, resulting in potentially significant — and often unexpected — losses for investors. Here, we will introduce contango and its effect on the futures-based commodity ETF markets, and how traders and investors can mitigate the potentially damaging consequences.

Contango defined

When the forward price of a futures contract is above the expected future spot price, the market is said to be in contango. This is a fairly common situation because under normal circumstances investors and traders are willing to pay a premium to avoid the inconvenience and costs associated with transporting, storing and insuring a commodity. Further out contracts often are priced higher than current ones.

The price of a futures contract will converge to the spot price as its expiration date approaches as a function of arbitrage, supply and demand. If a contract is priced above the spot price, as is the case with a market that is trading in contango, price eventually must move down to be in line with the spot price. Because contango implies that price must fall, long positions in contangoed markets can lose value. “Contango in action” (below) illustrates this concept. Read more

How to Leverage Market Contango and Backwardation

Jean Folger - Monday, January 28, 2013

This article appears in the February 2013 issue of Futures magazine.

While the word contango may sound mysterious, it is used to describe a fairly normal pricing situation in futures. A market is said to be in contango when the forward price of a futures contract is above the expected future spot price. Normal backwardation, which is essentially the opposite of contango, occurs when the forward price of a futures contract is below the expected future spot price. Because contango and backwardation are known states in the market, traders can employ strategies that attempt to exploit them.

Contango and backwardation are frequently seen in commodity markets where certain factors prompt the price discrepancy between expected future spot prices and the price of futures contracts. Here, we will introduce the two market states of contango and normal backwardation, explain why they happen and how they affect futures traders.

Back to basics

A brief review of exactly what a futures contract is can be helpful when trying to understand contango and backwardation. A futures contract is a legally binding agreement to buy or sell a specified financial instrument or physical commodity at a predetermined price in the future. The buyer of a futures contract (who is long the contract) expects price to increase, while the seller (who is short the contract) anticipates that price will decrease. A futures contract is an obligation to do something in the future.

Some futures contracts are settled in cash, while others call for physical delivery. Many commodity futures are physically delivered; however, market participants can hedge or speculate in the contract without ever taking physical delivery by entering an offsetting position before the contract expiration date.

Commodities are bought and sold on two separate but associated markets: The cash market, which involves the buying and selling of physical commodities, and the futures market, which involves the buying and selling of a future obligation. In a cash market, transactions are settled on the spot (thus the name “spot” market), meaning that the exchange between the buyer and seller takes place in the present. An instrument’s spot price is its market price, or the price at which it could be bought or sold today (often the futures nearest expiration is considered the spot futures).

In a futures market, on the other hand, any exchange between the buyer and seller takes place at some predetermined time in the future. The various futures contracts (for example, the February 2013, March 2013 and April 2013 light sweet crude oil futures contracts) state the price that will be paid and the date of delivery. Few contracts result in physical delivery because most are closed with offsetting positions before expiration. Read more

A Complentary Approach to Trading Technical Indicators

Jean Folger - Wednesday, September 26, 2012

This article appears in the October 2012 issue of Futures magazine.

Technical indicators are mathematical calculations based on a trading instrument’s past and current price or volume activity. When used as part of a technical trading strategy, indicators can help traders identify unique opportunities in the markets that could be overlooked by simply viewing a price chart. However, you also can cloud your analysis by tracking too many indicators that measure the same qualities of price and volume.

Here, we will review the different types of technical indicators, demonstrate how to apply complementary technical indicators to enhance a trading strategy and explain the importance of selecting dissimilar indicators to avoid multicollinearity, a condition that results from employing multiple similar component techniques.

Indicator types

Indicators often are divided into four categories based on what each group measures:

  • Trend indicators measure the direction and strength of a trend and typically use some form of price averaging to establish a baseline. 
  • Momentum indicators track the speed at which prices change by comparing prices over time.
  • Volatility indicators provide information about the trading range in a given market and its acceleration and deceleration.
  • Volume indicators represent the amount of trading activity that has occurred and analyze the force behind a price movement.

Read more

Controlling Losses: Stop Placement Techniques

Jean Folger - Friday, July 13, 2012

This article appears in the July 2012 issue of Futures magazine.

In the context of trading, risk refers to the probability of losing money or trading capital. Both novice and professional traders are exposed to this risk and experience losses when trading. Risk always will be there, and the inevitability of trading losses requires us to evaluate risk not just by asking the question, “What can I win?” but first and foremost, “How much can I lose?” 

Managing risk and controlling losses is essential to any profitable trading plan. While we tend to be optimists and focus on setting appropriate profit targets, we must dedicate more attention to determining acceptable losses, because you can’t win if you are knocked out of the game. Read more

Beginner's Guide to E-mini Futures Contracts

Jean Folger - Friday, June 15, 2012

E-minis are electronically traded futures contracts that represent a percentage of a corresponding standard futures contract. The e-minis make ideal beginner trading instruments for a variety of reasons, including round-the-clock trading, low margin rates, volatility and liquidity. This guide will discuss the e-mini stock index futures contracts, describe e-mini characteristics and introduce methods to trade these popular contracts. more

How to Leverage a Performance Report

Jean Folger - Tuesday, May 01, 2012

This article appears in the May 2012 issue of Futures magazine.

Many of today’s market analysis platforms enable traders to evaluate both actual and theoretical trading activity by generating a strategy performance report — an objective evaluation of a trading strategy’s performance. A strategy is a set of precise rules used to enter and exit the market, and strategy development involves defining those rules by using historical backtesting, optimization and forward testing to determine the most effective and potentially profitable parameters for the system. The report estimates how well a strategy should work.

A strategy performance report is a vital component of the process that helps traders identify the strengths and weaknesses of a system, and quantify the system’s viability using a series of mathematically based performance metrics. 

Quite often, even experienced traders fall into an analysis rut, relying on the same numbers and interpretations to evaluate their trading systems. For all of us, beginning and experienced traders alike, it’s helpful to step back and reconsider what our system reports are telling us. more