volumizer code

DIGITAL EXCLUSIVE40 FUTURES May 2013

FM: You successfully have made the transition from a large, traditional asset management house (PIMCO) to a successful global macro hedge fund firm (Armored Wolf), with in excess of $1 billion in assets under management. You launched Armored Wolf in 2009, arguably one of the most difficult periods in which to start a fund. Youve seen some tough markets in which to raise capital and trade. Tell us about your strategy and how it has evolved and changed since inception.JB: Our launch was driven by two interrelated super-secular forces. The first was the end of disinflation, and the second was the end of benchmark-driven management fees.

The end of disinflation we felt would mean the end of the free money created by falling yields and rising p/es. By 2008 we were in the 28th year of a bull market for financial assets. We saw equities essentially peak in 2000. Though theyve ground higher since, the combination of volatility, inflation and taxes suggests that any gains since 2000 are essentially illusory. Given the end of disinflation, we felt traditional forms of investing, equities and bonds, had seen their best days. As such we focused on building Armored Wolf s intrinsic firm capital by focusing on talent acquistion, infrastructure and solutions that would do well in sideways or rising inflation environments.

The other aspect involved benchmark-driven management fees. Though there have been fits and starts, with 2008 being a rather large fit, increasingly quantitative approaches to markets

have characterized the past 50 years. Recently, this has made the cost of getting benchmark exposure, particularly at the insti-tutional level, essentially zero. Not only would fees for such services, including [those] embedded within broader products, gravitate toward zero, but markets themselves would become more efficient. We no longer could assume simply that stocks for the long run would work. There would be no frictions, or disequilibrium conditions, that would allow this heuristic to apply going forward.

FM: What was it like to make the transition? What were the hardest lessons you learned?JB: It was a profound luxury [that] I fortunately could afford. In particular, it was a reckless tribute to the entrepreneurial desires I had always harbored, and [that] led me to drop out of my PhD program decades earlier. While I rely heavily on both my senior partners who help me run Armored Wolf, and my other col-leagues who both ply their trade and support me, I enjoy both the weight upon my shoulders and the breadth of challenges I face.

FM: What advice would you give new managers starting out?JB: The landscape is competitive. The most expensive cost one will face is surely denial--denial regarding ones strengths and capabilities, or denial regarding ones weaknesses. Ultimately, passion and desire are the only rocket propellants that will get one into orbit.

Q & A continued

Brynjolfsson continued from page 17

CoverStory_May13.indd 40 4/23/13 8:47 PM

DIGITAL EXCLUSIVE futuresmag.com 41

FM: Your firm embodies the convergence between traditional and alternative investments. For about a decade, traditional firms have been trying to get into the alternatives space, while hedge funds and other alternative managers have been trying to launch mutual funds. Meanwhile ETFs have become all the rage. Can you flesh out this landscape, and Armored Wolfs role in it?JB: Yes. At [PIMCO], though I ran the some of the largest mutual funds in TIPS, commodities and the asset allocation space, my approach was decidedly quantitative, relying heavily on a concept called portable alpha, in which alpha became the centerpiece of my efforts, and the benchmark took a backseat. So analytically speaking, my ability to allocate across specialist managers and manage portfolios myself, was seamless.

In terms of clients and mandates, our firm spans the gamut. Our people and infra-structure, starting with my co-founder Mohan Phansalker (former CLO for PIMCO, now Armored Wolf s COO & general counsel), span a variety of structures, regulatory frameworks and asset classes seamlessly.

Currently our clients are Eaton Vance: Armored Wolf serves as sub-advisor for the EV Commodity Strategy Fund; Curian Capital: Armored Wolf serves as a sub-advisor providing ETF model portfolio for Curians retail separate account product; OFI: Armored Wolf serves as sub-advisor for the OFI SSP-Armored Wolf Euro Inflation-Linked Bond UCITS Fund; James Alpha: Armored Wolf serves as advisor for the James Alpha Global Enhanced Real Return Fund; and Armored Wolf is the manager of various institutional separate accounts and privately placed funds (hedge funds) in the high-yield and abso-lute return arena.

FM: So coming back to the current investment environment, and synthesizing both your background, and your investment

process, what can you tell us about the current outlook?JB: In terms of inflection points, Im drawn to commodities generally, and the tensions embodied therein. In the energy market, you have rapid innovation transforming: The supply side, transportation infra-structure, and via conservation and substitution, the demand side. This innovation, or these pro-ductivity enhancements, are keeping a lid on energy inflation. In the metals, and precious metals, you have a different and much more bullish dynamic going on.

Pricing for commodities, and metals in particular, is based on three intimately interrelated markets. The first and foremost of these is the long-term market, where ultimately supply and demand fundamentals intersect. The second is the spot mar-ket, where at each instant for every buyer there is a seller. The third, the glue that ties these first two together, is the market of storage, or inventories. Inventories are the time machine by which spot sale of current production is in effect delayed, as the material is transported into the future.

With the global economy experiencing a new normal sub-par rate of growth and industrialization, for five or more years as Reinhardt and Rogoff describe in their sarcastically titled book, This Time is Different, the spot market for many metals is relatively glutted. Dont be fooled however. The longer term fundamentals could not be stronger.

I dont expect this to endure. For some commodities, those that are difficult to store, this disconnect will simply endure, until gradually the passage of time will resolve the discrepancy. For metals markets, the cost of storage is low, so the spot mar-ket and the long term market remain linked. Low interest rates further facilitate this arbitrage.

Precious metals are of course the most direct way to play this, with platinum, at a discount to gold, providing both fundamen-tal, and relative value.

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CoverStory_May13.indd 41 4/17/13 3:32 PM

DIGITAL EXCLUSIVE

A technical indicator is used to provide a distinctive perspec-tive 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 avail-able 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 todays trading platforms enable users to program their own cus-tom indicators using some sort of pro-prietary language (such as TradeStations 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 indica-tor, using as an example the Volumizer indicator, designed to evaluate the rela-tionship between average price and aver-age volume. The graphic in Go with the flow (right) provides an overview of the development process that we will use.

Define the conceptThe idea for a custom indicator can come from fields outside of trading; for exam-ple, 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.

For our example, we use a daily price chart of the SPDR S&P 500 exchange-traded fund, with volume inserted as a sub-chart. From observation, there appear to be trading opportunities as price and volume diverge and converge (see Behind the moves, right). Further, it seems that there are often changes in

Knowing how to build your own indicators is critical for todays technical trader.

Here, we detail the process from conceptualization to coding.

Creating custom indicatorsBy Jean Folger

Trading Techniques

T e c H n i c a l a n a l y s i s

42 FuTures May 2013

designing your own indicator

how to program it yourself

Testing your work

For more from Jean Folger, go to futuresmag.com/Folger

These are steps involved in building a custom indicator.

Go wiTH THe flow

Source: PowerZone Trading

Define the trading concept

express the concept objectively

Determine the indicators appearance

Program the indicator (or have it programmed)

Test the indicator

Use the indicator to improve trading

TT_F_May13.indd 42 4/17/13 2:32 PM

DIGITAL EXCLUSIVE

the average volume preceding strong market trends.

Because we are looking at price and volume on two completely different scales, however, it is almost impossible to measure this type of movement in this context objectively. If we were simply to superimpose volume on an existing price chart, the relationship between price and volume would be distorted by the scaling of the chart. In other words, more data (a wider chart) would provide a much dif-ferent relationship between average price and volume than a chart with less data (a narrower chart). This would render this type of trading analysis useless because it would be subjective and, thus, difficult to reproduce for the purpose of making consistent trading decisions in the future.

This is where a custom indicator can help confirm (or negate) the hypothesis that divergence and convergence between average price and average volume may be an early indicator of strong price trends. Our next step is to combine these two data sets into a single indicator to visu-alize the analysis and help determine if it has merit as a trading indicator.

Express yourselfA large part of developing successful indi-cators is being clear, specific and objec-tive about the concepts. For example, it is not sufficient to simply state when the market is in an uptrend You must define what exactly it is that constitutes an uptrend. Examples of specific defini-tions might be three consecutive higher highs, a nine-period moving average crossing above a 30-period moving aver-age or ADX is over 20.

Going back to our example of combin-ing average price and average volume, we now must define every aspect of the con-cept and create a method of expressing this relationship objectively. First, we define the average price and volume as 40-day aver-ages (see Objectively speaking, right).

Average Price = Average closing price over the past 40 days

Average Volume = Average volume over the past 40 days

Because price and volume have many different values and scales, we attempt to express one in terms of the other. In

this case, we create a formula to express volume relative to price so both can be viewed simultaneously. One way to accomplish this is to look back and deter-mine a range for both price and volume, and then build a formula that normal-izes average volume to fit into the aver-age price scale. We look back over a fairly

significant amount of time (200 days) to create the range values:

Price range = (Highest average price of the past 200 days) (Lowest average

price of the past 200 days)

Volume range = (Highest average

futuresmag.com 43

our concept begins as an observation: There appear to be trading opportunities as price and volume move toward and away from one another.

as we develop the Volumizer indicator, we define the average price and volume as 40-day averages.

BeHinD THe moves

oBjecTively sPeaKinG

Source: TradeStation


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Price

volume

40-day average of price

40-day average of volume

TT_F_May13.indd 43 4/17/13 2:32 PM

DIGITAL EXCLUSIVE

volume of the past 200 days) (Lowest average volume of the past 200 days)

We then build a formula that normal-izes volume:

Relative average volume = ((Average volume) (Lowest average volume of

past 200 days) / (Volume range * Price range)) + Lowest average price of

last 200 days

Now that this relationship has been defined, we can continue the process of converting the concept into a custom indi-cator that can be applied to a price chart.

Chart itOnce the concept behind a trading indi-cator has been defined, traders must decide how the indicator should appear. Indicators can take on many differ-ent forms and its up to the trader to determine which method is most visu-ally effective for displaying the concept. Indicators can appear on a price chart in many different ways: As a separate study below a price chart

(think Stochastic or CCI) Lines overlaid on top of price (such as

moving averages or Bollinger bands) Dots or arrows projected over price

bars Differently colored price bars Text, lines or other annotations added

to a price chart

The goal of an effective indicator is to highlight the condition or conditions defining the trading concept or calcula-tion. A good trading indicator will pro-vide the trader with a clear and unique visual representation of trading activity that may not have been evident from a price chart alone. Traders should be care-ful, however, not to add too many indica-tors to a chart. This can become confus-ing or detract from the most important part of a chart: The price.

The Volumizer indicator comprises two components: The 40-day average price and the 40-day relative average volume. We overlay both on the same price chart. Because we are looking for differences between price and volume, we highlight the area between the aver-

age price and relative average volume. To accomplish this, we color the area blue to reflect instances where average price crosses above the relative average vol-ume, and red when average price crosses below relative average volume. This way,

it should be easy to recognize the ideal conditions in an attempt to substantiate the concepts of the indicator.

Writing the codeMost system trading platforms use their

Trading Techniques continued

44 FuTures May 2013

The below instructions are written for Tradestations easylanguage. however, the pro-gramming concepts apply to all proprietary languages.

volUmizer inDicaTor coDe


//========================

// Volumizer Indicator

//========================

{======== Program Header ========}

inputs:

AvgLength(40),

LookBack(200);

variables:

PriceAvg(0),

VolumeAvg(0),

PriceHigh(0),

PriceLow(0),

VolumeHigh(0),

VolumeLow(0),

Volumizer(0);

{======== Calcualtion Block ========}

PriceAvg = average(c, AvgLength);

VolumeAvg = average(v, AvgLength);

PriceHigh = highest(PriceAvg, LookBack);

PriceLow = lowest(PriceAvg, LookBack);

VolumeHigh = highest(VolumeAvg, LookBack);

VolumeLow = lowest(VolumeAvg, LookBack);

Volumizer = (VolumeAvg - VolumeLow) / (VolumeHigh - VolumeLow) * (PriceHigh - PriceLow) + PriceLow;

{======== Plotting Instructions ========}

plot1(Volumizer, Volumizer);

plot2(PriceAvg, PriceAvg);

plot3(Volumizer, HighPlot);

plot4(PriceAvg, LowPlot);

if PriceAvg > Volumizer then begin

setplotcolor(3, blue);

setplotcolor(4, blue);

end

else begin

setplotcolor(3, red);

setplotcolor(4, red);

end;

TT_F_May13.indd 44 4/17/13 2:32 PM

DIGITAL EXCLUSIVE

own proprietary programming language, and traders either can write the code for the indicator themselves or work with a qualified programmer. The code is simply a list of instructions that must be written in an exact format. Each horizontal line of code, referred to as a statement, gives the computer a different command; these statements form the building blocks of the program.

While the actual programming falls outside the scope of this articleand, in any case, will vary depending on what system you employ generally it is help-ful to use a structured approach to pro-gramming that breaks the code down into three sections: The declaration (or program header):

Assigns values to the variables of the program, including user-definable input variables

The calculation block: The math behind the indicator

The plotting instructions: Tell the pro-gram which calculations to plot and how they are to be displayed

Traders who decide to work with a programmer can save (sometimes signifi-cant) time and money by providing the programmer with exact specifications for the project. Programmers generally frown upon subjective or vague instructions, and instead require objective rules to code an indicator efficiently and accurately.

In addition to the indicators function, it is important to specify how it should look. Any specific variables for which traders would like to be able to change values, such as lookback period or price type (open, high, low, close), should be included in the project specs as well.

In the Volumizer example, the length of the averages and the number of bars used in the range calculation can be adjusted by the user. This way, traders can experiment with different settings without the need to reprogram the entire indicator.

We have written the Volumizer using TradeStation EasyLanguage (see Volumizer indicator code, left). The concept, however, easily could be applied to other charting platforms that allow the programming of custom indicators. Charting volume (right) shows the

completed indicator: The blue line is the average price The red line (on the main chart) is rela-

tive average volume The areas highlighted in blue indicate

that average price is above relative aver-age volume

The areas highlighted in red show that relative average volume is above aver-age price

Get testyThe next step in the development process is to test the indicator by monitoring it in a live market. The purpose of testing is three-fold: To make sure the indicator does what

you expected it to do To determine if the indicators appear-

ance is what you intended To establish if the concept is valid

Once an indicator has been developed, it may not be a big stretch to incorporate it as part of a trading strategy that can be tested and eventually traded using some level of automation, if desired. By utiliz-ing the indicator in a strategy, a trader quickly can determine if the trading con-cept has any merit.

As the flow chart indicates, if testing reveals that the indicator does not per-

form as expected for any reason, it needs more work. This might entail minor revisions, such as tweaking one line of code, or the trading concept may need to be revised to develop a more useful trading tool.

Once the development is complete and the indicator has proved to be useful, it is ready to be used in the markets. It is up to each trader to decide how to apply an indicator to the markets that he or she trades. It is important not to confuse tech-nical indicators with strategies. Indicators provide a visual representation of some type of market condition. Strategies, on the other hand, are objective sets of rules that specify the exact conditions for trade entries and exits. While strategies can be based on multiple trade filters and trig-gers, including indicators, it is the strat-egyand not the indicatorthat deter-mines when a trade is made.

Custom indicators can be important additions to any traders toolbox because they allow traders to identify specific market conditions rather than being limited to a trading platforms standard selection of indicators.

Jean Folger is the co-founder of, and system

researcher with, PowerZone Trading, llc. Jean

can be reached at www.powerzonetrader.com.

futuresmag.com 45

When average price is above average volume, the area is shaded in blue. The red areas show when average volume is above average price.

cHarTinG volUme


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TT_F_May13.indd 45 4/17/13 2:32 PM

DIGITAL EXCLUSIVE

Few trading strategies are as divi-sive as the trading range break-outan approach that probably has as many detractors as followers. This is illustrated by the results of search-ing trading breakouts in Google. The first result provides a basic guide, while the second emphasizes reasons traders should not even try to use them.

Yet, breakout trading is one of the first trading strategies many are introduced to in the field of technical analysis. What we really want to know, though, is whos correct? Are breakout strategies a valid, profitable method for trading, or should we keep looking elsewhere for the elusive Holy Grail?

Breakouts 101A trader focusing on breakouts looks for a narrow trading channel or trad-ing range in a security or futures where volatility has diminished. The goal is to establish a position as price breaks out of this trading channel concurrent with a spike in open interest, thereby taking

advantage of the increase in volatility and catching a strong trend move.

The concept is sound at its core, given an ideal context, but detractors do have some valid points. These include the risk of false breakouts; many price channel breaks will correct back to the breakout point, or beyond. These are more com-mon than the ideal explosive moves, which are rare.

Most traders who start out with break-outs quickly become aware of the cons of this strategy. At the same time, however, its easy to see many breakouts work with textbook perfection, making it difficult to just throw in the towel, especially if as a new trader you have no idea what to move on to next.

The truth is, the way many of us are taught to trade breakouts is wrong. Trading a breakout involves more than simply recognizing a channeling mar-ket and placing a trade when the upper channel is supposedly broken, with a protective stop under the lower end of the channel (or vice versa for a short position). Flushed out (right) depicts a common scenario. It shows a 15-min-ute channel breakdown taking place in E-mini Dow futures. The channel breaks lower on strong momentum only to turn

around rapidly over the next 15 minutes to break through the upper end of the trading channelwhere traditional stops would be placed. This flush in the Dow subsided as quickly as it began. Futures went on to have a strong break lower throughout most of the morning.

Using traditional breakout strategies, the earlier flush would have taken many trad-ers out of a short position established at the initial break lower. Not only did a profit-able move take place without the would-be short trader, but an initial, ultimately cor-rect, position was stopped out at a signifi-cant loss. This is the textbook example of why you shouldnt trade breakouts.

Simply dismissing the trade shown as yet another breakout that didnt work, however, does nothing to help us under-stand how to make money with this strat-egy. There were numerous signs that the trigger shown in Flushed out was high risk, even though the channel itself was a strong breakdown candidate. Its just a matter of knowing what youre seeking.

Signs of successOne of the first things to consider in a

Trading breakouts can be treacherous, but if you follow a few important rules, you can

be successful over the long term. The keys, though, may not be what you expect.

Everything you know about breakout trading is wrongBy Toni Hansen

Trading TecHniques

B r e a k o u T s

46 FuTures May 2013

Keys to trading breakouts

understanding when breakouts fail

secrets to successful channel trading

For more from Toni Hansen, go to futuresmag.com/Hansen

TT_H_May13.indd 46 4/17/13 3:27 PM

DIGITAL EXCLUSIVE

trading channel breakout is the momen-tum, or pace, of the price moves within the channel itself. A trading channel is essentially a series of smaller trend moves whereby the price of the security bounces between support and resistance levels (the lower and upper ends of the channel). How the momentum of these moves shifts within the channel is a good indication not only of the direction of the breakout, but also whether a breakout is sustainable.

When the momentum of upward moves within a trading range is slower than the downside moves, then the probability of a break lower increases. In the breakdown in Flushed out, the situation was reversed. The upside moves within the channel were stronger than the downside moves prior to the first breakdown attempt. This is indicated by the steeper angle of the moves from A and C in Momentum setup (right).

It was not until after the first break-down and upside flush that momentum shifted. The two-wave correction follow-ing the first breakdown attempt began with the strong flush higher off the lows from D to 1, but as E-mini Dow futures went for the second high from E to 2, this momentum changed. The buying slowed compared to the selling, and it took nearly twice as long for the Dow to recoup losses off the high marked as 1 than it did to return to the zone of that high at 2. The breakdown coming off that second high following the failed breakdown earlier in the morning had a better chance for success.

Another notable difference between this second setup and the first breakout was the entry trigger. In Momentum setup, the smaller channel break from the slower upswing within the channel provided the entry trigger as opposed to a break in the lower extreme of the entire channel.

Because the early breakdown in Flushed out was followed by a two-wave correction back into the channel and because the second wave of that correction was slower than the first, the odds of a successful trade dramatically improved; thus, the need for a wider con-firmation of a channel break diminished. The channel was now ripe for a break-down, even though the prior low had not yet been tested, let alone broken. In fact,

waiting for that break to occur would have increased the risk of failure because much of the trades potential would have been spent when the trigger occurred.Another factor that bolstered the second setup was the amount of time it took for the trading channel to form prior to each breakdown attempt. Corrections within a

security tend to last for comparable peri-ods of time when the moves leading into the channels are similar. So, when trying to determine if a trade may be too early or whether an ideal amount of time may have passed, study previous corrective moves.

Timing is everything (page 26) depicts a similar period of price conges-

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futuresmag.com 47

How often have you been here: The market initially breaks lower, retraces to your stop loss level and then proceeds to charge confidently back in the direction of your original position?

Pre-breakout momentum is a powerful indication of whether the breakout will be successful. Breaks in the direction opposite of previous strong moves tend to fail.

Flushed ouT

MoMenTuM seTup



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stopentry

trigger

entry trigger

a B c

d

e

12

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15:00 5:00 10:0020:00 3/21

TT_H_May13.indd 47 4/17/13 3:27 PM

DIGITAL EXCLUSIVE

tion on the same time frame two days earlier than the breakdown weve been studying (although the strategy was slightly different because of a wider trad-ing range). When the Dow congested on the left side of Timing is everything at A, it was faced with a premature break-down attempt also.

In terms of time development, the amount of time the Dow had corrected off lows prior to the attempted break-down was similar to the level where it tried to break lower in B. This is shown in the blue rectangle. It was not until later that a larger decline began in the A congestion. This indicated a risk that the first breakdown attempt in B could also be a false start. Once this sec-ond period of congestion lasted as long as the prior one, however, the true break-down began. For even greater clarity, go back further in time to locate additional channels for comparison.

Another example using this method

for entering in anticipation of a breakout is shown in Go with the flow (right). The Dow had fallen into a narrow trad-ing range. Near the beginning of the range, it did not show a strong bias for the direction of a breakout based on the five-minute time frame alone because the momentum of swings off support and resistance within the range was compa-rable in A and B.

As the channel progressed, however, overall momentum shifted and a small-er channel formed in C that consisted of another two-wave correction off the highs of the larger channel. This time, the momentum of the second wave lower was similar to the first, so when the pullback broke higher, it retested the entry zone. Because the second pullback was not stronger than average, however, it still held and offered a much larger return on risk than waiting for the upper end of the entire channel to break.

The main goal of a trader, no matter

the strategies employed, is performance consistency. An ideal strategy is one that returns more than the risk, and does so more than 50% of the time. Few raw breakout strategies will achieve this. However, by tweaking our setups to use triggers within the range itself and by taking momentum into account, stop levels can be cut by one-third to half, while the odds for success increase.

Additional tweaking is possible, and can yield even better returns; however, the number of trading opportunities diminishes. Its the burden of every trad-er to find his or her own comfort level when approaching risk because higher accuracy does not translate always into higher returns.

Toni Hansen is president and co-founder of

the Bastiat group, inc., dBa Trading From

Main street. Learn more about Hansen and

the educational services she provides at

www.tonihansen.com.

Trading TecHniques continued

48 FuTures May 2013

Time, not just distance, is a critical part of any price formation. in the case of breakout setups, successful breaks tend to replicate the durations of previously successful moves.

TiMing is everyThing


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small break

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aB

TT_H_May13.indd 48 4/17/13 3:27 PM

DIGITAL EXCLUSIVE futuresmag.com 49

By carefully monitoring momentum and time setups, we can better assess the validity of different channel breakouts. Here, we might have gotten in much earlier than we would have waiting for a confirmation of a break of the ultimate channel high.

go wiTh The Flow


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1st entry trigger

a Bc

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1217:00 8:00 9:00 10:00 11:00 12:00 13:00 14:00 15:00 3/24 18:00

Put Time and Money on Your Side and

Take Your Trading to the Next Level

Subscribe to

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TT_H_May13.indd 49 4/17/13 3:28 PM

Trading Options in Turbulent Markets: Master Uncertainty through Active Volatility ManagementBy Larry ShoverJohn Wiley & Sons, Inc., 2013The first edition of Trading Options in Turbulent Markets was published by Bloomberg Press in 2010.$46.29, 277 pages

Review by Paul D. Cretien

Larry Shover options trader, invest-ment officer, portfolio manager and television commentator opens his book stating his first objective is the management of risk while taking advan-tage of market volatility, including his-torical and implied vola-tility. His second purpose is to explain everything options: skew, Greeks (delta, vega, theta, and gamma), risk tolerance and trading strategies (covered call, naked and married puts, collars, straddles, vertical spreads, calendar spreads, butter-flies, and wingspreads). The chapters that follow fill out the descriptions and strategic uses of each of those topics, plus the VIX volatility index.

Because trading derivatives is by and large a risky business, it is interesting to see how Shover applies the trading tech-niques in an effort to conquer uncertainty. He states that we still face a stunning amount of uncertainty in the markets as in life and addressing this uncer-tainty as options traders is what this book is all about. The books subtitle includes another of the authors objec-tives: I sought to write this second edi-tion uniquely combining options trading and volatility in a universe that is beyond control and sometimes terrifying.

Shovers book assumes that the reader has a relatively advanced knowledge of options trading and theoretical pricing models. At the same time, each trading strategy and theoretical subject such as skew, volatility and probability is covered in detail so that

they immediately are useful to both new and experienced options traders.

However, along with an experienced and knowledgeable presentation, there are several questionable points. For example, early on Shover states that probability can be determined by using either the practical observance of the frequency of past events or theoretical forecasting models, while later we are informed that probability does not actually exist in practice and that prob-ability is a magnificent yet dangerous concept. Of course, these thoughts do not impede the use of probabilities and measurable risk in every trading strategy and the description of a trading plan as a high-probability strategy.

The level of options trading experience and knowledge assumed is indicated by several dis-cussions in the book. In the concepts of volatility and theta, As volatility increases, so does theta, and In any option class there will eventually be a crossover effect wherein theta becomes more of an issue than vega. These statements are followed by the warning that It is absolutely crucial to be able to delineate the dif-ference, in your position,

between vega and theta. In many instances the book will make

the reader want to look at options charts to see if the authors ideas are really true and useful. Thus, it may indirectly result in a much larger store of knowledge of trad-ing techniques and variables such as Greeks and volatility. For example, do out-of-the-money options have a propensity to pick up more gamma as volatility increases? Because gamma is the speed of change in delta (slope), and option price curves become less steep with increased implied volatility, this would seem to be counterin-tuitive. Time to get busy with options charts to check this out!

Assuming that the trading strategies and pricing relationships are accurate an easy assumption in view of Shovers extensive experience the only error in the book (calculating the S&P 500

30-day return by VIX) is calling 3.464 the standard deviation of 12, when it is the square root of 12.

The book includes three parts: 1. Understanding the relationship between market turbulence and option volatility; 2. Understanding option volatility and its rela-tionship to option Greeks, personal decision making and odds creation and 3. Ten proven strategies to employ in uncertain times.

Part 3 is really a book in its own right, containing five types of spread trades, including vertical and calendar spreads, backspreads and ratio spreads, butterflies, condors and wingspreads. The initial chap-ter in Part 3 prepares the trader in terms of sound trading decisions, approaches to options trading and the mind of a suc-cessful trader. Then, before starting on spread trades, Shover describes the covered call, covering the naked put, the married put and collar strategies. In several Part 3 chapters, the trades are shown in relation to all of the Greeks, assisting a trader to visu-alize the important connections between implied volatility and other pricing ele-ments.

Paul Cretien is an investment analyst and

financial case writer.

Trading with Intermarket AnalysisBy John J. MurphyJohn Wiley & Sons, Inc.$85.00; 234 pages

BY leSlie n . MaSOnSOn

John Murphy is a pioneer in the area of intermarket analysis, since his first book on the subject was published in 1991. At that time no one was paying attention to the value of using that type of analysis for trading or investing purposes. Today intermarket analysis is more widespread and useful in explaining the markets machinations. Murphy emphasizes that there have been a few changes in the inter-market relationships over the past decade, and that traders need to be aware of the new normal in their trading.

He is a well-respected and widely fol-lowed technical analyst with more than four decades of stock market experience.

Book ReviewS

50 FutureS May 2013 DIGITAL EXCLUSIVE

BookRev_May13.indd 50 4/17/13 3:23 PM