By

John Sheely

A FEW REFLECTIONS AS A CAREER TRADER AND A

DEDICATED TECHNICAL ANALYST

I started trading shortly after the New York Mercantile Exchange began. I worked for Commodity Corporation at the time and traded a book

of physical and financial energy contracts. Our firm had no technical trader, so I used the discipline I developed in law school to learn

everything I could about technical analysis. As the computers began to be an integral part of trading, trading systems began to flourish in

the commodity markets. In order to trade at the highest level of performance, it became imperative that traders understood the world of the

quantitative trader. As we now know, quantitative analysis is beginning a critical element of every financial discipline. Technical analysis

has been transformed from an art form to a science. During my career, I have managed more than 50 million dollars as a registered

advisor and have traded for several high profile firms. I offer these observations of how these trading models began and why their use will

only continue in the future.

IMPORTANT DISCLAIMERS

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW.

NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR

TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE

RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.

ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH

THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO

HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL

TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN

SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS.

THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY

SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL

PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.

There is a high degree of risk involved in any type of trading. Stocks, Options, Futures, and FOREX trading is notsuitable for all investors. Past results are not indicative of future returns. Your Trading Room, its subsidiaries and allaffiliated individuals assume no responsibility for your trading or investment results. Individual performancedepends upon each individual’s unique skills, time commitment, and effort. All information herein is forinformational purposes only and should not be considered as investment advice regarding the purchase or sale ofsecurities, options, futures, Forex or any other investment instrument of any kind.

As computers began to become an essential part of trading, many trading systems began to be

offered to the public. Most of the early systems were moving average systems. While the 50 and

200 day moving averages were already heavily observed by many traders, the 4, 9, and 18 day

moving average systems began to be introduced to commodity traders for use in their daily

charts. Traders quickly learned the terms drawdown, risk to reward, and consecutive loss.

Dow Jones Industrial

Vendors began to offer trading systems to the public in stock index futures and other commodity

contracts. Hypothetical reports, such as this example by TradeStation, became common. The

public paid $3,000 for many of these systems; all of which were best-fit hypothetical creations.

For decades, many of these systems created a poor image of technical analysis and the craft of

systematic design. This has all changed in the last decade, as financial firms began to take

another look at trading systems and the work of the skilled technician.

5 and 20 Crossover/Under Moving Average System

The analysis of today is not based upon simple moving averages or other common technical

indicators. Today analysis is guided by the science of statistics and probabilities. The bar chart is

transformed into a landscape of equations and risk to reward profiles.

Sophisticated Models and Analysis Begins to be Created

This analysis begins with a market scan of hundreds of stocks and dozens of commodities and

forex currencies. From this matrix, other algorithms identify opportunities in daily prices.

Market Scans

These daily scans identify potential trades for the following day.

Scans Identify Opportunity, based upon predefined criteria

Technical indicators can be created to identify trends, but the power really remains to the

algorithms which turn that analysis into execution.

The microscope is then turned to observe intraday prices

After tens of thousands of historical trade data has been examined, a trading strategy

begins to emerge. Every effort is made to make sure the strategy has not been created from

a best-fit analysis. In essence, hundreds of collective years have been examined to better

understand the model during periods of changes in volatility and poor trend conditions.

Trading Models begin to form

There are new innovations being created every day as research continues. The quantitative

analyst takes a whole new look into different chart types from tic bars, range charts, or renko

charts. Using the same disciplines as before, profitable models emerge.

New Innovations with older chart types

Hypothetical performance such as this is only the beginning of a true robust analysis. Tens of

thousands of trades are reviewed and many asset classes are examined.

Forex Renko Trading System in Various Pairs

As I mentioned, research is now exploring a variety of entry techniques that are incorporating

different chart types and execution software to allow the trader to manage his trades effectively.

Models are being created while using a variety of chart types.

May 6, 2010 is a day that will be remembered for a long time by investors and regulators

alike. The “flash crash” was a day where the machines took over. Trading firms now know

what can happen when the algorithmic programs go into overdrive. Even to this

day, exchanges and regulators are uncertain as to how they can truly prevent this

occurrence in the future. Perhaps price movement limits will work, perhaps not. We will

not know until the next flash event occurs in the future and there will be another event in

the future.

While there has been an explosion of quantitative models entering the

marketplace, there is a warning on their affects on market behavior.