ichimoku kinko hyo

33 Pages·2012·2.04 MB·English

CONTENTS

 Letter from the President - Page 3
 Editor’s Note - Page 4
 GuruMeeting - Meet with Mr. Larry Berman, an Interview by Sushil Kedia - Page 5
 ICHIMOKU KINKO HYO - A Complete Trading System by Anil Padia - Page 13
 Quant...um Leap: Graduating from Manual Analysis to Automated Trading by Manish Jalan - Page 17
 Trading is not Investing by Joe Ross - Page 20
 Testy Bytes by Kora Reddy - Page 23
 Book Review - Super Trader by Meghana V Malkan - Page 26
 Past Events’ Update - Page 28
 Forthcoming Events - Page 30

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.
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LETTER FROM THE PRESIDENT

Dear Colleagues,
ATMA is an inclusive effort. Our goal is to include all professional Technical Analysts in a thriving professional community to achieve
common goals of learning together, knowing together & growing together. One thing you can do to expedite this goal is to forward this
monthly newsletter with excellent reading material to all fellow Technical Analysts who you believe will enjoy reading this as much as
you do with a suggestion that they too can obtain a totally free subscription by visiting the subscription page on the ATMA website and
filling up their details.

ATMA is very near to a breakthrough that we have dreamt of since inception - our own E-Library of commercial grade books and not just a collection of
Research papers! Good volunteers who may step forward to take ownership of this initiative will help expedite it further. With the launch of the E-library in
the foreseeable future, it would clearly be possible to take the best of the publications in or field across the length & breadth of India in the most cost effective
way. No longer, a Gunjan of Hoshiarpur or a Madhavan of Goa will have to regret inability to visit the physical library at the BSE Building!

As our monthly newsletter progresses further, Meghana has major plans. One of them would be to institute a reward for Article of the Month! She is working
out details of what will qualify a submitted article as one such. This would be possible to institute when we start receiving many more articles & given in some
months only when the criteria are met. Competition is good for expanding collaboration!

In the very near future, all our eyes are set on the BSE Trading Hall where we are hosting Mr. Larry Berman on 1st September 2012 & Mr. David Keller on the
6th October 2012 respectively. Both events are “By Invitation Only” & “For Members Only”. Look forward to meeting all ATMA members at these two great
events!
Sincerely,
Sushil Kedia
JULY 2012 ATMASPHERE | 3
EDITOR’S NOTE

Here’s presenting you with the third issue of ATMASphere!
The GuruMeeting feature of this issue contains an interview of Mr. Larry Berman, Past President, MTA interviewed by our President.
Here he reveals the tools that he uses out of the technical analysis tool kit, his view on Elliot Wave Analysis; including his interactions
with the Guru of Elliot Wave – Mr. Bob Prechter himself. He also gives us a sneak peek into the agenda for his Mumbai visit next month.
In this issue -
1. Anil Padia brings in the readers to the Ichimoku Trading System and explains its basic concepts and parameters.
2. Joe Ross, a trader, educator and author presents an interesting write-up on the difference between trading and investing – from a psychological view point.
The educative journey in our regular features continues. In the ‘Quant…um leap’, Manish Jalan introduces the concept of ‘Alpha Generation’. Kora Reddy
explains how Excel could be used as a backtesting tool in ‘Testy Bytes’.
The Book Review section reviews the “Super Trader” by Dr Van Tharp.
We always appreciate your feedback and look forward to hearing your thoughts on ATMASphere. You can email us at [email protected]. You can also
subscribe to ATMASphere completely free by clicking here.

Sincerely,

Meghana V Malkan
4 | ATMASPHERE JULY 2012
GURUMEETING SK: I am doing fine too, thanks. Let me come straight to what excites all of us

most as members of the MTA and members of the ATMA. What attracted
MEET WITH MR. LARRY BERMAN, AN INTERVIEW BY
SUSHIL KEDIA you towards technical analysis?
LB: Well it is actually going back to the late 80’s. I was coming right out of
University. I got a job in a brokerage firm and one of the guys that worked

there who was sitting next to me used to be a floor trader in Chicago. I was
trying to figure out what investments to put clients in and back then we were

selling mutual funds. He had a chart book. He kept drawing point and figure

charts by hand. He calculated stochastic by hand. Back then there weren’t
any good computers like we have today. Although there were some, I
Larry Berman, Past President MTA Sushil Kedia, President, ATMA
remember the firm we had - The Lotus 123 Application. I developed a macro
Interview Transcript that could read price series input in a column and could create a point and
figure chart. I started creating point and figure charts by computer through a
LB: Larry Berman SK: Sushil Kedia
lotus programme. That kind of thing got me into it. He said something
SK: Hello everyone and welcome to the July edition of the Guru meeting. We important to me very early in my career “It does not matter what the
are very excited to host Mr. Larry Berman, past president of the MTA and analysts write on the reports, it matters what people do with their money.”
currently a board member in that capacity. He has been a vice chairman of And to me that was an epiphany and I said “Yeah!! If everybody says it is
IFTA, President of the Canadian Society of Technical Analysts and he leads bullish, the stock should go up” but it does not go up, that means probably
the business of ETF Capital Management. He brings to the table more than everybody is in. And so I started reading lot of books about the crash that
two decades of investing and trading experience using an integrated just happened in 1987 and what was going on in the market. That really
approach of Technical and fundamental Analysis. Very much welcome to you sparked my career in terms of looking at things fundamentally. Shortly
Mr. Berman. How do you do? thereafter I started a CFA program on the fundamental side. I was then
introduced to the CMT program in 1991 and quickly started that as well. I use
LB: I am doing alright, how are you doing Sushil?
a balance of fundamentals and technicals but 95% of my investment decision
JULY 2012 ATMASPHERE | 5
is about risk management. And for that you have to use technicals. weekly chart I then know to increase my investment size. Let’s say, my
Fundamentals really do not help you with risk management. maximum position on any one trade might be 5% of the portfolio. If my daily
is oversold but weekly is in the middle of the range, then I may only do half a
SK - So Larry which specific tools and indicators find your favour? What are
trade. I use indicators kind of differently and I use a lot of behavioural
the tools and indicators that you work most with?
analysis gauging which tools are going to work best in different market
LB - One of the tools I use most is behavioural finance (understanding mass environments.
psychology). When I am in India next month speaking to your members, one
SK - Larry we are aware from our many conversations that you keep in close
of the topics I am going to be covering is trying to identify what your
contact with Mr. Robert Prechter who is very popular in India and you have
personal trading strengths and weaknesses are from the perspective of
done lot of Elliot Analysis yourself. So what is your view on how Elliot analysis
behavioural finance. How our mind works? I go across the country in Canada
adds value to the repertoire of Technical Analysis?
here and try to speak to investors. I do it through my weekly TV show. We
have done a series of analysis asking people questions. One of the simple LB - That’s a great question. Bob is a good friend of mine and I have had a
questions is related to trading decisions - You own a stock and you have a very good pleasure of presenting him with an award that the Canadian
position and it has got an open profit of say $1,000. You know there is an Society of Technical Analysis came out with in 1999 shortly after the passing
event risk coming up the following week which is earnings. If the earnings are of Jack Frost. Many may know that Bob did his seminal work on Elliot
good it would go another $500 up or it could get cut at half. So what would Analysis with Jack in his book that came almost 30 years ago now. So when
you do? You take the risk or you not take the risk and you close the position. Jack passed away, the CSTA came out with the Annual Jack Frost Memorial
And how you answer that question is going to help you as a trader and Award and I presented Bob with the initial award in 1999. Ever since then we
investor. It helps you identify what tools you should be using. What tools I have been close friends. We chat periodically about markets. I think Bob is
use may not be appropriate for other people to use because of the way they one of the smartest guys on the planet. Bob influenced the core part of my
think about investing. One of my favourite tools many years ago was MACD. I thinking on Technical Analysis. It is all about time frames. Bob tends to take
found that it had some limitations. I then developed a hybrid of MACD that very long term cycle view of things. He focuses a lot on the Super Cycles. Bob
looks at market cycles. I will show your members my Trading Cycle indicator has been talking about the Grand Super Cycle peaking for a long time now. In
at the conference. I like the RSI and that is a very good indicator for fact he was on my TV show last year talking about the year 2016 for being
identifying shorter term trading opportunities but I look at a multi time- the next ultimate bottom for the Grand Super Cycle. For me personally, what
frame approach. So when I get an oversold RSI reading on a daily and a happens between now and 2016, I do not know. My clients are concerned
6 | ATMASPHERE JULY 2012
about what is going to happen for the next quarter or two. So when it comes on. So in S&P 500, you have got 500 stocks from diversified sectors, so you
to using Elliot wave or any other technical tool for that matter, you have to can do Market Breadth analysis and you can do Relative Strength analysis.
be in the right time frame that is important for your investors. We know From the perspective of a Portfolio Manager being in the right stocks at the
Elliot wave is a great tool for fractal analysis and understanding multiple time right time when they are outperforming is far more important than
frames. Just because Bob Prechter or anyone who practices Elliot Wave understanding the wave counts. Even though the wave counts are interesting
Theory might be bullish or bearish, do not take that and make your and can be helpful, being in the right stocks at the right time makes more
investment decision. Understand what markets it works well and what sense. I learned one thing from Ralph Acompora many many years ago and
markets it doesn’t work well because no indicator works well in all markets. this was before he made his Dow 10000 call when he was in a firm on Wall
If you haven’t figured that out yet the markets will school you eventually. If Street. I made an internship with the MTA very early in my career in the early
you have been in the market long enough then you will understand that no 90’s and studied the techniques of all the Wall Street guys and got to know
opinion is smart enough and it is really about risk management. Well again, them really well. One of the things Ralph said to me was that it was great
looking at Elliot Wave I distilled the essence of it that made sense to me and forecasting the Dow and knowing the wave counts but you also got to know
developed a set of tools that help me navigate the market through the the 30 stocks and you got to know what they are doing. If the markets are
cycles. I don’t use Elliot wave in particular as in 1/2/3/4/5 and a/b/c. I going to go up then 25 of 30 have be able to go up and the big ones with the
developed a set of tools that I will share with ATMA members next month big dollar values; since the Dow is dollar weighted; are going to lead the
when I am speaking in India. charts. So when you are looking at an Index, do the wave counts but know
that an IBM at 190$ is ten times more important to the Index than GE at 18$.
SK - That would be so kind of you. That brings to mind that Elliot Wave is
So it matters more what the wave counts of the IBM are than it does on GE
extremely popular in India and yet in my interactions with many of my
even if we know that GE is bigger company than IBM as per market cap. I
colleagues in Western part of Europe I find that the popularity of Elliot Wave
know that the Indian markets don’t have tremendous amount of breadth to
is not so much. Any particular reason you might attribute to why Indians are
them although my knowledge of Indian markets is small and limited to the
so much fascinated by Elliot Wave and it is not practiced so heavily in Europe
main index Sensex. So I am really looking at India, looking at the few big
as well as USA?
stocks and looking some the global ETFs that proxy the Indian Markets. Elliot
LB - I have some ideas there. I think it depends on the breadth and maturity Wave tends to be very popular in markets that don’t have a lot of breadth,
of the markets. So for example if you are trying to evaluate the S&P 500, volume statistics those kinds of things. In currency markets, Elliot Wave is
everyone knows that is the benchmark in the world that everyone focuses important because you cannot really do a Relative Strength analysis, nor can
JULY 2012 ATMASPHERE | 7
you do any breadth analysis. A lot of tools that equity market investors may SK - We have also heard some good stuff about Ralph Acompora from you.
look at are not available for currency markets. So I think in some of the more For the current generation of technicians and the new ones getting into the
developing markets in the world Elliot Wave is a more natural way of looking market, which other earlier technicians’ work would you recommend for
at things whereas when you are into a very matured market you can look at getting your hands better into the hood?
other statistics like Market Breadth or Relative Strength to really get a better
LB - The biggest influence on me in my career has been work of J M Hurst.
assessment of the potential of an Index overall. When you are talking about
Many people understand his work in terms of market cycles, trading
individual stocks I am not really sure why someone would go to Elliot Wave
envelopes and trading bands. That has been a huge influence in my career. I
over chart pattern per se although within Elliot Wave in wave 4 we get
will give you an example. If you are trading stocks, it does not matter which
triangles. When you recognize the wave structure you recognize the triangles
one, say for example Tata Motors, what you want to do is understand how
and find out that you are into a wave 4 which can give an advantage. Some of
the stock trades like the back of your hand. Know where the lines are. So you
the combinations of techniques can help. I think if you are just looking at
can look at the price history of something and know what the average
Elliot Wave by itself, it probably is a weak form of analysis. When you
trading range is in the last quarter or month or a week or a year. Let’s say the
combine it with volume, when you combine it with momentum indicators or
average trading range of the stock in a year from high to low is 25% and you
trend indicators then you are getting a more complete picture. So Elliot wave
have gone back 20-30 years, you have a pretty good sense that if you are in a
is very good fundamental building block but I think you need more than just
trade and you have got 15/16/17 percent profits, there is a good chance that
one technique weather it is Elliot Wave or Gann Analysis or any other
you are getting to the top of the range so when I think about things, of where
technique or for that matter including Dow Theory. You need more than just
I bought them and what the price targets might be, it is not about wave
looking at the index and making a projection to get a sense of what is
counts, it is about probability. It is understanding what normal behaviour is.
happening under the hood. I sometimes think technicians are more of auto
When volatility increases you can expand your trading range, when it
mechanics where we lift up the hood of the car and see that carbonator has
decreases you decrease it. And when I approach things from my probability
some gunk on it and see that the fan belts are frail. And what that means to
stand point it really elevates my analysis and my performance in the markets
the technicians is that the advance decline line is breaking down, it is not
because investing is more about probabilities and statistics than it is about
making new highs, there is a bit of weakness in momentum and therefore
getting the right wave counts or getting the right forecasts. Forecast is great
the engine is probably going to slow down and potentially break down on the
but Risk Management is the most important thing and to me that is about
road. So that is how I think about things.
statistics and probabilities more than any specific technique and forecast.
8 | ATMASPHERE JULY 2012
SK - So Larry, which kind of markets get your attention most? As an ETF love the mechanics. I think it is one of the greatest challenges. Like the stock
Investor, you pretty much have an access to the whole universe. But out of market, every time you play it, it is different. Some days, your swing works
that which are your favourites? and you are in a groove. It is just like making a call in the market where you
get the way it can. Like some days you get every little tick and you shoot a
LB - This is a good question. For many years in my career, I was an analyst
72. And the next day; the same course and same golfer, you do not
and it is really only in the last 6-7 years that I have taken on portfolio
understand it and you have a negative P&L on the day. Same golfer, same
management role. I have worked for banks and I have traded proprietary
skill set. To me, golf is a lot like markets, but it also gets me away from the
books for banks where you have no one to report to except the risk manager
screens. Over the years, looking at the tick tick tick, sometimes it is too much
and the focus is extremely short term. You have day-to-day P&L. You have a
and you got to take a step back. Golf is a game of strategy where you make a
fiduciary responsibility to a client. One of the clients who is a 30-year old can
good shot and you have got 180 yards to carry over and you have a shot into
have a big time frame, another one who is 85 does not have huge time
a well-guarded green. It is kind of being in a profit situation or a loss, how do
frame. They have very different risk tolerances. You have got to understand
you manage that risk. And so I really enjoy the game of golf. To me it is a lot
the difference between that kind of approach to the markets and that has
of strategy and I love it to teach it too. That is probably my biggest hobby
really changed my perception of things. It very different from being an
outside of spending time with my kids these days. We launched the
analyst. You are making a forecast based on some techniques and are
Independent Investor Institute in 2011 where we teach individual investors
running money and having a P&L and showing people what we do adds
everything from day trading skills to managing their own portfolios will asset
value. There is quite a big distinction between the two ways of using
allocation of ETFs.
technicals - as a practical practitioner and as an analyst giving a price target -
both are very different. SK - That is fantastic Larry. What is your belief - what is the differentiating
line and what are the factors that make or break a good analyst from
SK - Larry, do you find time for any hobbies or past times? What kind of
becoming a good investor or a trader?
hobbies do you indulge in?
LB - That is a great question. The transition for me was hard. Standing up in
LB - Absolutely, when I was much younger, I played competitive baseball. The
front of a room of traders and sales people when I worked for a Bank as a
baseball unfortunately developed arthritis in my hips and then baseball
strategist for 10 years; it was easy for me to get up and say “listen the charts
wasn’t something I could really do in a great way anymore. So I migrated into
are bearish here and it time to sell stuff”. The reality is most sales guys sell
golf. I am an above average golfer, I am low handicapper. I love the game, I
stocks; they do not short stocks, although there is the hedge fund crowd.
JULY 2012 ATMASPHERE | 9
This reminds me of an incident. I said one day “Listen I think the market can SK - Larry, given the fact that you are a qualified Chartered Financial Analyst
come off 10%, I am all in cash” and I really felt good about things. I was trying as well as a Chartered Market Technician, for a lot of newcomers in the
to say things are going to get bad here for a while. But none of the sales guys business (though some people can remain a newbie for quite some time)
wanted to hear that. One of the guys called me off to the side afterwards and there has been an ongoing debate in the business that has been popping up
said “Listen, we have got to sell stocks to these people so why don’t you tell again and again - Fundamental Analysis v/s Technical Analysis. There are few
them what could they buy to protect themselves in the down market?” So like you have been practicing what may be called `Fusion Analysis’. So what
that was very interesting to me. As a portfolio manager, I have got the have you got to address to this set of people who are hoisting a flag of
functionality and the variability to go in cash for a while. We set up business Technical Analysis v/s the flag of Fundamental Analysis? What would be your
that way because that is the best way to deal with people instead of Long comment to that?
Only world. Especially as we are all aging as a society and we need to keep
LB - I think there is a lot of confusion out there about what TA is. There are
our money as we retire. Making a transition from the analyst and saying “Hey
people who are educated PHDs from MIT and the top schools in the world
it’s rolling over, it’s bearish”. Ok, how much money do I take off the table?
that haven’t a clue how to manage money. Just because you are educated
Do I take the same money off the table as a guy who is 30? As a guy who is
and have credentials doesn’t make you good. What makes you good is
65? Probably not! So there is no one mutual fund that works for everybody.
learning from your mistakes. A fundamental analyst that is bullish on a stock
For our business we set up really customized portfolios for clients. So we
and has a buy recommendation where there is 30% upside and standing at
have different models and different trading techniques. Some designed
the table and saying “I like the company fundamentals”. And then all of a
through Relative Strength and sector rotation; others are designed long-
sudden the stock comes down and then he says “By the way we have a
short. Whereas some others are designed as pairs trades. So there a lot of
problem” and then the analyst downgrades the stock. That is a lousy analyst.
different techniques. Transitioning from being an analyst to actually running
When you incorporate technicals and fundamentals, what the charts tell you
money and having fiduciary obligations, whether you are a prop trader at a
is that - what Bob French told me almost 25 years ago - pay attention to what
Bank or running money at a pension fund, it is vastly different. And what
people are doing with their money and not what the analysts are writing
helped me make the transition was understand the end client’s need and not
about. So you got to understand that the markets are smarter than you are.
approaching it from the perspective of making a market call based on a chart
Regardless of what technique you use, technicals or fundamentals or quant
pattern. That really helped me transition from one side to the other.
or some hybrid, some fusion or whatever it is, understand that the markets
are always right and it is all about managing risk. And these things whether it
10 | ATMASPHERE JULY 2012