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Stocks & Commodities Interview

May 2014, Part 1

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Interviewed by Jayanthi Gopalakrishnan from "Stocks & Commodities magazine"
CopyRight 2014 Stocks & Commodities magazine.

SVESylvain Vervoort’s career started with Bell Telephone, which was in those days an ITT-owned telecommunications company. As a support engineer for private communication systems in export sales, he was introducing systems and training people in many parts of the world. He later moved onto CERBERUS, a Swiss security company bought by Siemens in 1998, where he was responsible for product management. There, he was involved with computers and software from their very beginning after the invention of the transistor and the birth of the Intel 8008 microprocessor. His first computer was a homemade copy of the Tandy TRS80 (which was made by Radio Shack) with the maximum allowable amount of memory for the time — 48 KB of RAM. He has always been fascinated by computer hardware, computer programming, and later on, technical analysis of the stock market. His book Capturing Profit With Technical Analysis, published by Marketplace Books, received the AXIOM Business Books Awards bronze medal in 2010. His DVD Ground-Breaking Band Indicators includes an autotrading expert system. We have published a couple dozen articles by him in this magazine, including a popular seven-part series last year on indicator rules for a swing trading system. Many of his S&C articles over the years have received our Readers’ Choice Award in the “favorite articles” category, as voted on by S&C readers. You can follow his weekly technical analysis of the S&P 500 index and the forex pair EUR/USD at his website, www.stocata.org. Stocks & Commodities Editor Jayanthi Gopalakrishnan interviewed Sylvain Vervoort via email in mid-March 2014 about how to profit from swings in the markets.



Sylvain, tell us about how you got interested in technical analysis.

The European Option Exchange (EOE) was founded in 1978 in Amsterdam as a futures and options exchange. I believe it was 1979 when an enthusiastic stock trading colleague at work talked to me about the possibility of trading options. He convinced me that this was the place to be — make a lot of money with little starting capital. With a group of other colleagues, we gathered some 400,000 Belgian francs (some 10,000 US dollars) to start an option investment club. I was going to make the trades based on technical analysis, and everybody would become rich in no time! A few months later, the money was gone. Luckily, we continued our meetings at a nearby Chinese restaurant, so it wasn’t all sad. Since then, I have been on what seems to be a never-ending quest to find the ideal way of trading the stock market based purely on technical analysis. After completing an investment and credit advisor course, I conducted many courses and presentations about technical analysis and options. The best thing about presenting a course is that as a teacher, you learn the most; many thanks to all who have attended my courses!

You use specific candlestick patterns, chart patterns, indicators, and so on. How did you come up with these patterns and indicators?

It all started with trying to find out if all those standardly available indicators on their own or in combination were giving consistent long-term positive results. My findings, I am sorry to say, suggested that they were not. After some time, I realized that most indicators could be modified to show better results. That was the next step — developing a large number of my own indicators. These modifications mostly involved some way of smoothing the indicators to remove input noise as much as possible. For example, I wouldn’t use closing price data but instead would use smoothed data like a typical price or a heikin-ashi average closing price. Recently, filtering out as much input noise as possible, I am using range bars and modified renko bars. Let me show what I mean by telling a bit more about the difference between a standard candlestick chart, a range bar chart, and a modified renko chart.

How about starting with standard candlestick charts?

Steve Nison was the first to present Japanese candles to the Western world. The candlestick chart has a fixed time setting on the x-axis a 10-minute EUR/ USD chart, that is, each bar is of a 10-minute duration. Note how periods of very little price change are alternated with short-term volatile large price moves. This makes it difficult to draw trendlines, and an indicator like the stochastic RSI is not that easily applicable, moving up or down when there are only small moves and mostly late in reaction with sudden large moves.

What about range bar charts?

They were developed by Vicente Nicolellis, a Brazilian trader and broker. In Figure 2 is a 10-tick (5 pips) EUR/USD range bar chart. Range bars take only price into consideration; therefore, each bar represents a specified movement of price, not of time. The range bar chart in Figure 2 has approximately the same start and end time as the 10-minute candle chart in Figure 1, but there is a big difference in appearance. The price move of the range bars is much smoother, resulting in much better and more predictable indicators. Drawing trendlines 1 and 2 on the 10-minute chart was not useful, but it worked well with the range bars. Trendlines 3 and 4 give better results on the range bar chart. Trendlines 7 and 8 can be drawn easily and are profitable on the range bar chart but not on the 10-minute chart.

Candlechart

Figure 1: Standard candlestick Chart

Range bar chart

Figure 2: Range Bar Chart

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