To qualify for the Best Dressed List, a market must meet the following criteria:

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Calvin Howard
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1 Best Dressed List Each year at about this time I publish the Best Dressed List, showcasing the best examples of classical charting principles from the just-completed year. The Best Dressed List illustrates the types of trading situations that Factor LLC has sought over the years in its proprietary account. These type of trading situations will become almost the sole focus of Factor LLC s trading in the future. A more complete perspective and discussion on this aspect of Factor LLC s proprietary trading and its relationship to our blogging activity is at the end of this document. To qualify for the Best Dressed List, a market must meet the following criteria: 1. A clearly defined (no doubt about it) classical chart pattern at least 12 weeks in duration on the daily and weekly charts in a tradable market. 2. A decisive breakout with little or no pattern retesting. Secondary breakouts are considered when an initial earlier breakout failed. 3. A sustained trend to the implied target. Whether or not Factor LLC successfully captured the pattern is not a criteria for inclusion (at least not consciously). The list is broken down into two sections: The Best Dressed List and the Honorable Mention List. Best Dressed List Market Pattern(s) Date completed Target(s) Cotton 8-week symmetrical top 4/13 at met on 4/28 The historic bull market in Cotton ended with a classic 5-point symmetrical top. What this topped lacked in duration it made up for in form and clarity. Massive bull trends often end with brief and simple tops. 1

2 USDCAD 7-month W bottom 9/21 at met 9/30 W or double bottoms can be tricky to trade because the official breakout is the clearance of the mid-point high and allowances have to be made for pullbacks up to a third of the height of the pattern. This pattern first broke out on Aug 8, but then chopped sideways for 6-weeks, forming a 6-week ascending. The breakout of this secondary pattern on Sep 30 reconfirmed the double or W bottom. The market reached its target in just nine days. There is a lesson here. Sometimes patterns that develop over many months can become fulfilled in a matter of days. Lengthy patterns, quick thrusts will be a reoccurring theme in this document. Market Pattern(s) Date completed Target(s) EURCHF 5-month rectangle 5/23 at met on 7/12 There is a special lesson in this chart. EURCHF broke out on May 23. After the breakout the market drifted downward for four weeks, then experienced a sharp one week rally. Yet, throughout this lack of downward progress the entry point was never really challenged. This chart also shows that markets can far outshoot the implied minimum targets of their launching patterns. 2

3 Market Pattern(s) Completion date Target(s) S&P month H&S 8/2 at met on 8/8 A short trade in the S&Ps in late July/early Aug had two things going for it. The decline simultaneously sliced through a classic 3-fan principle from the March 2009 low and completed a 6+ month H&S top pattern. Significant patterns such as this H&S top often complete small patterns just prior to the major breakout. The right shoulder completed a small double-type top on July 29 prior to the Aug 2 completion of the H&S. The target of 1155 was met in four trading days. There is a lesson to be learned in this market example. It was difficult to step up to the line and short the stock indexes on Aug 2 when it had been down hard for five straight days. Yet, going short was the thing to do. Often times the best trades are the toughest to pull the trigger on. There is another lesson. After taking a quick but large profit in a matter of days everything in a trader s gut will plead there is money left to be made. It is difficult to remove winnings from the table and walk away. The subsequent two months of chop would have eaten into the profits taken from the decline. 3

4 Market Pattern(s) Completion date Target(s) USDMXN 4-month rounding bottom and 6-week 8/8 at and 9/9 at met on 8/9 and met on 9/21 This pattern provided a 1-2 punch. A 4-month rounding bottom was initially completed on Aug 4, confirmed on Aug 8. The target of this bottom was met almost immediately by the thrust on Aug 8 and Aug 9. The market then formed a symmetrical right above the iceline of the rounding bottom. The completion of this on Sep 9 provided a swing target of 13.50, reached on Sep 21. It is not unusual for very thinly traded markets such as the Peso to provide an excellent signal every year or two. Market Pattern(s) Date completed Target(s) Platinum 8-month rectangle 9/22 at met on 10/4 The elongated trading range in Platinum formed a textbook rectangle pattern. It would have been tough stepping to the line and selling the market early on Sep 22 after a $75 per ounce drop the day before, but a sale on Sep 22 would have become a profit immediately, never to be put in danger. The target was met eight days later. 4

5 Gold/Swiss 15-week symmetrical 8/12 at met on 9/6 I think it is important to periodically check out unconventional price relationships, such as Gold priced in Swiss Francs, the FTSE priced in EURUSD or Silver priced in Yen, etc. Sometimes a real gem can be uncovered. Who is to say that Gold should only be traded against the USD. Remember, when a person goes long Gold, being short the USD is implied. On Aug 12 the price of Gold measured in CHF completed a massive. I would have never guess that the final surge in this spread would come from the CHF side of the spread (when the Bank of Switzerland intervened in the forex market on Sep 6). In a spread such as this a trader wants to have approximately an equal US dollar commitment on both sides of the spread. In this case, a contract of Comex Gold and a contract of IMM CHF were worth about the same US dollar value. Market Pattern(s) Completion date Target(s) Soybean Meal 7-month broadening top 9/22 at met on 11/25 The weekly chart only is presented. I am including this market to make one point. The market dropped sharply by a full $60 per ton before breaking the lower boundary of the pattern. Talk about selling a market in the hole! Yet, a sale made on Sept 22 at the close would have never been put in jeopardy prior to the attainment of the target. The biggest profits are made in market that are really moving quickly. Yet, many traders are afraid of chasing big breakouts. 5

6 Gold 11-week symmetrical, then measuring gap 7/12 at , met on 8/3, then 1880 met on 8/19 The last leg up in the historic Gold bull market (at least the last leg so far) concluded in grand fashion. The advance on Jul 12 completed a textbook continuation symmetrical. The target of this pattern of 1674 was met in three weeks. Then the real excitement occurred. The up gap on Aug 8 was a measuring gap. I blogged about the gap at the time at This gap provided a measured target of 1880, met on Aug 19. Market Pattern(s) Date completed Target(s) Russell month H&S top 8/2 at met on 8/5 Seldom is a H&S pattern so picture perfect and symmetrically balanced. The decline on Aug 2 completed the pattern and the target was met within a few days. Notice the small failure top completed on Jul 27 when the market closed below 811. It is very common for mature patterns to provide an early entry. However, there is a danger for a trader to force an early entry. Attempting to anticipate the completion of a massive pattern can lead to getting chopped up in a trading range and then missing the real move when it comes. I know this trap all too well. 6

7 FTSE month symmetrical 8/3 at met on 8/8 Most of the global stock index futures collapsed along with the U.S. markets in early August. The FTSE formed a textbook symmetrical top. Market Pattern(s) Date completed Target(s) London Sugar 3+ month falling wedge 5/18 at on 6/28 The price targeting of wedges can be tricky (not as if any price measurement is exact science). The wedge in London Sugar appears to have originated at the Feb high. However, a proper falling wedge should be defined with five contact points, the first of which should be a low point. Thus, the Feb low is actually the first definition point of this wedge, with the Mar high as the first high point. The Mar high then becomes the target, which was met in late Jun. Note the small H&S bottom during the final 6-weeks of the pattern. 7

8 Soybeans End around the 9/15 at met 11/25 symmetrical Failure patterns are a very nuanced category within chart construction and the biggest error a trader can make is to find too many failure patterns. True failure patterns are rare, but when they occur substantial profits are possible. The Soybean market completed an upside breakout of a continuation on Aug 26. I remember the breakout because I bought it. The market drifted sideways for two weeks before moving back into the. Note that prices never moved above the Feb high before rolling over. The first full day below the upper boundary was Sept 14, but if there was any doubt about a failure sell signal it was cleared up by the big down move on Sept 15. There is usually one way to get into a failure pattern signal at the market. This signal sprang an enormous bull trap and the market was not going to make it easy for the longs. The original measurement of the (applied downward) identified a target of around 1110, met in late November. 8

5-Year T-Notes 6-month H&S bottom 5/5 at 118-28 121-24 met on 8/1 I recommend monitoring the daily and weekly charts of both the nearby continuation graph as well as the nearest individual contract.

9 5-Year T-Notes 6-month H&S bottom 5/5 at met on 8/1 I recommend monitoring the daily and weekly charts of both the nearby continuation graph as well as the nearest individual contract. Sometimes you will see a tradable pattern on the continuation chart that is not visible on individual contract charts. When this happens it is necessary to become creative in both entry and exit strategies. An excellent example of this type of event occurred in the 5-Yr. T-Notes when the weekly and daily continuation charts showed a wonderful H&S bottom not visible on the individual contract month charts. Yet, note how the breakout on the continuation chart coincided with an important chart point on the individual contract month chart. 9

10 NY Sugar 13-week bull channel 6/2 at met on 6/28 Whereas the London Sugar broke out of its falling wedge on May 18, the NY Sugar completed its bottom two weeks later, on June 2. Had both markets broken out simultaneously I would have chosen the NY contract to trade. But in this case both markets could have been traded. The breakout was a little tricky, especially on May 31 and Jun 1, but the pattern was resolved on Jun 2. Market Pattern(s) Date completed Target(s) Lumber 4-month complex double 4/5 at met on 4/12 top This is a very thin market, yet it provides an occasional lay-up trade. The decline on Apr 5 completed a complex double top. If there was any doubt about this top, the expansion of volume beginning with the Mar 28 decline was a big tip off. Expansion of volume should be considered as starting volume or stopping volume. Obviously a trader may take the wrong read on the nature of volume. But the close in Lumber on Apr 5 and especially Apr 6 should have lead to only one conclusion that the volume expansion was starting volume. The market met its target within a few trading days, drifted sideways for a week, and then trended well past the initial target. 10

Honorable Mention List Market Pattern(s) Completion date Target(s) Live Hogs 8-month rising wedge 12/8 at 87.35 82.

11 Honorable Mention List Market Pattern(s) Completion date Target(s) Live Hogs 8-month rising wedge 12/8 at near miss on 12/16 This pattern is also on the Honorable Mention List because the drive down on Dec 16 came 45 points shy of the target before reversing back up. Nevertheless, because I covered my shorts near the low on Dec 16 I am including the market. This pattern was absolutely classic. Note the classic exhaustion overthrow of the upper boundary at point A. The close back under the upper boundary on Oct 24 was a good sell signal. Then at point B the market formed a small double-type top. It is not uncommon in very long duration patterns for the final high or low to be accompanied by small reversal patterns. I fully expect this market (via the April contract) will be on the 2012 Best Dressed List. 11

12 Swiss Franc futures 28-month symmetrical 9/22/10, secondary met 7/25 completion 12/2/10 In September the CHF futures completed a massive 28-month symmetrical. This chart situation is on the Honorable Mention List due to the fact that the initial breakout was sloppy. It would have taken a lot of patience to wait out the 2+ month retest, even though the retest would have only marginally placed a well timed entry into a loss. The market provided an excellent secondary entry on Dec 2 an entry that would have never been put into question. There are a couple of excellent chart lessons in this market. First, note the numerous continuation patterns along the way to the target. A trader would have only been capable of staying with this trade and pyramiding if he or she had confidence in the target of the massive. Second, this is an excellent example of how a simple moving average can be use to stay in a major trend. 12

13 CRB Index 6-month descending 9/22 at on 9/30 This is on the Honorable Mention List as an illustration of classical charting principles. The CRB Index is not a tradable futures contract. Review So, what is the point of the annual Best Dressed List? It depends! If you are a casual user of charts in your trading this document will be an interesting read, but not much more. And that is ok. Similarly, if you are a swing or scalp trader this document will have only passing interest. But, if you rely primarily on classical charting principles and if your goal is to catch the really big and significant chart patterns, this document needs to become your point of reference your guiding star. There are lessons in this document that must dictate your approach to markets in the future. If you are primarily a chartist, if your goal is catching big patterns and if you have three or so years of trading history, my guess is that your trading performance falls in to one or two camps. Read the following and determine which shoe fits. Well intentioned, but impulsive, impatient and undisciplined You over trade. You really want to focus on the big patterns, but you get caught up in the day-to-day price volatility. You miss a major move (launched from a great pattern) and you become determined not to miss the next one. You see a substantial pattern developing and become obsessed with getting in early. You get chopped up within the construction of the pattern, buying brief bursts of strength, selling weakness. When the pattern finally launches you are gun shy. You catch the initial breakout, Focused, intentional, patient and disciplined You see big patterns developing, but remain patient. You avoid the temptation to jump the gun. You place your entry stops well outside the boundaries of the pattern and keep them there. You are not interested in the nicking of a boundary line, but want to see a decisive breakout. You do not burn through your chips during the construction of a pattern. But when the real breakout occurs you step up with conviction and significant leverage. You avoid taking quick profits. As long as 13

14 but get out way too soon, remembering all the losses you had during the construction of the pattern. You never get positioned the way you should and miss most of the move. You become all the more compulsive about not missing the next big pattern. The cycle continues. Most of your trading occurs during the construction of the big patterns. You are right on a lot of big moves, but have little to show for it. You know you need to be more patient in waiting for the genuine breakout, but market volatility keeps sucking you in early. your initial position does not run into red ink you are willing to stick with your commitment. You avoid the emotional urge to grab open profits or use trailing stops. You seldom look at your position during the trading session. You have a protective stop in place and rely on that to protect your position. You seldom trade more than five or so times per month. Once your target is reached you retreat and have no desire to keep trading the same market. You turn your attention, instead, to finding the next possible big move. I have lived in both camps and I will tell you the camp on the right offers the best living conditions. Living in the camp on the right equals dysfunction and frustration. A study of the Best Dressed List trading situations is a reminder that the most profitable major patterns have several things in common. There is no hurry to get aboard. It is best to wait until the real move begins (although mature patterns often give an advance warning). An urge to preposition often ends in getting chopped up and then missing the real move when it comes Breakouts are decisive. While a process of retesting can occur, a well-timed entry is seldom put into a serious loss Even though a market can be oversold or overbought at the point of breakout, there is actually very little risk at entering at the breakout The moves to the targets are most often sudden and quick. Patterns that take months to develop can deliver their profits in a matter of days As a general rule it is best to exit at the target and then avoid any temptation to reenter the same market any time soon Perspective Historically, my trading profitability has been a function of four primary factors. 1. What proportion of the Best Dressed trades did I catch and what proportion of the trades caught were exploited all the way to the targets? Obviously, the greater the proportion of trades caught and carried the distance, the greater the profitability. 2. Did two or maybe three of the Best Dressed trading situations set up in a manner that allowed me to establish a highly leveraged ( bet the farm ) position and did I take advantage of these unique set ups? Obviously I do not literally mean best the farm. An example of this category of trade that allows me to risk 2% of capital rather than a typical risk of 70 basis points and a specific set-up allowing for twice the number of contracts per unit or risk. The result could be a trade in, let s use Gold for an example, when I can assume 30 contracts per $1 million rather than a typical trade of 10 contracts per $1 million. 3. How many potential Best Dressed market situations ended up failing? It is easy to see the best examples of classical charting principles after the fact. Yet, there are other market situations during a year that look like potential Best Dressed trades, but fizzle out. Obviously, such market situations contribute negatively to the bottom line. 4. How active was I in trading shorter-term patterns and what was the net result of these trades? In other words, did I become more oriented to shorter-term trades than intended? Historically, becoming shorter-term focused has contributed negatively to my net bottom line because I tend to lose the forest from the trees. 14

15 I want to further discuss item #4 above. I see patterns all the time good patterns in fact of three to eight weeks in duration. A major hurdle to successful market speculation is in knowing one s own personality and emotional make up, strengths and weaknesses. A trader any trader, all traders are their own worst enemies in the markets. Emotional management is far more important than trade signaling. Knowing what to do and actually doing are two different things. I find that these shorter-term chart patterns can (if I am not careful) throw me off my game. Becoming involved with shorter-term chart patterns can force me to lose the forest from the trees. There is nothing wrong with trading four to eight week chart patterns don t misunderstand what I am saying here. My point is that my main goal is to catch the much bigger patterns and getting involved with small patterns can lead me down a rabbit trail. Each year I grade myself on these four factors. Some years I have performed extremely well on these measures. Other years I have, for a variety of reasons, performed poorly. I underperformed in I give myself a C grade for the year (and this grade is probably generous). Without going into extreme detail, my nose became too close to the chart book in I have given my self grades ranging from D to A- over the years. My goal is to earn a B+ each year. What would a year with a B+ grade look like? I would catch 60% of the Best Dressed market situations and would carry a meaningful position to at least 70% of the target. I would correctly identify and trade two load the boat market situations. These market situations occur when the breakout of a Best Dressed market situation offers an extremely low risk entry point, allowing a much higher leveraged position than is typical. Ideally, at least 50% of my net annual profit would come from these two trading situations. I would participate in no more than 20 potential Best Dressed market situations that end up failing. I would limit trading in shorter-term chart situations to no more than 20 percent of the total annual trading events, and these shorter-term chart trades would provide a net profit. ### 15

16 Factor LLC Best Dressed List 2011 Market Pattern Date completed Breakout price Target Date target met USDCAD 7-month W or double Sep Sep 30 bottom S&Ps (Sept) 7-month H&S top Aug Aug 8 USDMXN 4-month rounding bottom and 6-week Aug 8 Sep Aug 9 Sep 21 continuation EURCHF 5-month rectangle May Jul 12 Cotton (July) 8-week symmetrical Apr Apr 28 Platinum 8-month rectangle Sep Oct 4 Gold/CHF 15-week symmetrical Aug Sep 6 Soybean Meal 7-month broadening top Sep Nov 25 (Dec) Gold (Feb) 11-week symmetrical Jul 12 Aug Aug 3 Aug 19 Measuring gap Russell month H&S top Aug Aug 5 FTSE 100 (Sept) 6-month symmetrical Aug Aug 8 London Sugar 3+ month wedge May Jun 28 Soybeans (Nov) 7-month symmetrical Sep Nov 15 end around 5-Yr T-Notes 6-month H&S bottom May Aug 1 on continuation chart Sugar (Oct) 13-week bull channel Jun Jun 28 Lumber (Jul) 4-month complex double top Apr Apr 12 Factor LLC 2 North Cascade Avenue Suite 720 Colorado Springs, CO Factorco@gmail.com 16

Preview. To qualify for the Best Dressed List, a market must meet the following criteria:

Preview. To qualify for the Best Dressed List, a market must meet the following criteria: Best Dressed List -- 2013 1 Preview Each year at about this time we publish the Best Dressed List, showcasing the best examples of classical charting principles from the just-completed year. The Best Dressed