System trading, also known as mechanical trading, automated trading, algorithmic trading and rule based trading, is one of the two popular trading methods; the other is discretionary trading. It is the trading practice where a trading system trades on behalf of a trader. The system makes all trading decisions with respect to the rules set by the trader and the info available at the time. System traders rely on the ability of the system to find trading opportunities and to execute trades.

Usually all the trading decisions like entry and exit points, stop-losses and position sizes are made by the system, but it is possible to override the decisions. Most trading systems come with standard trading rules, which need to be customized according to the traders' trading goals, risk tolerance and the securities/markets traded. As all trades are done automatically, traders can practice complicated trading strategies.

• The first thing to note is that the system makes absolute trading decisions. A buy or sell process is triggered once all the requirements are met; and the system never trades until the minimum requirements are met.
• System trading eliminates human emotions like fear and greed from influencing the trading.
• As the decisions are made automatically, traders can conduct large-scale trades with complex strategies like arbitrage.
• The strategy is better for short-term trading like intraday trading and swing trading; but not for long-term trading and investing.
• The strategy is good for persons who want speed and accuracy in their trades; and who want to save time.
• System trading is usually less flexible and adaptable than discretionary trading.
• While system trading favors novice traders more than discretionary trading, the system still requires to be fine-tuned for making good profits with minimum risk/loss.

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Zig Zag indicator is used by traders to reduce the "noise" in a trending security. It is very useful in finding price trends, finding support and resistance levels and in evaluating chart patterns like head and shoulders pattern, double tops and double bottoms. Actually Zig-Zag is not considered a true indicator, but as a filtering program to eliminate random price swings of a given period.

There is not an exact formula for zig zag indicator; it is a computer program which wipes out all price movements less than x percent or points. For example if you use a 5% filtering, all price movements of the stock less than 5% will be eliminated from the graph. Traders can also set the zig-zag amount in points. Thus the indicator helps the traders to better explore the market cycles and long-term chart patterns.

Zig zag trading indicator is widely used in Elliot wave analysis. The indicator is a lagging indicator and has zero predictive power. The last leg of the indicator is generated dynamically; it can change as the last leg is not set until the future price is already known. Traders should never use zig zag indicator for generating entry and exit points but for just understanding past price movements. The indicator can offer better results when used with other indicators and chart patterns.

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Concealing baby swallow is a bullish trend-reversal candlestick pattern indicating the start of a new uptrend after a downtrend. It is a four candlestick pattern comprised of all bearish (black or colored) candlesticks. Bullish concealing baby swallow pattern is a highly reliable pattern, where trend reversal occurs because of the extreme bearishness of the trend.


The requirements of a bullish concealing baby swallow pattern include,

• The market should be characterized by a significant downtrend.
• The first two days are characterized by bearish marubozu candlesticks without any upper or lower shadows.
• The third day is a bearish day opening below a gap and is characterized by an inverted hammer formation, the shadow of which trades into the body of the second day candlestick.
• The fourth day is also a bearish marubozu day which opens a gap above the third candlestick and completely encloses the third day candlestick.

Bullish concealing baby swallow formation occurs when there is a strong bearish sentiment in the market. The bearish marubozu formations of the first two days indicate that the downtrend is strong. But the long upper shadow of the third day candlestick and gap above opening of the fourth day candlestick indicate that the trend is weakening. The fourth day also offers a perfect opportunity for shorts to cover their position. Once that's done, the trend is expected to reverse.

Bullish concealing baby swallow is a highly reliable formation; however, a bullish candlestick with a gap-up or a higher close on the next trading day is necessary for confirmation of the trend.

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BRIC ETFs are exchange traded funds which invest in stocks associated with BRIC nations, which are Brazil, Russia, India and China. These are countries which are considered as the leaders of emerging economies because of steady and fast economic (GDP) growth in the past and are constantly exploring their high levels of natural/human resources. BRIC ETFs allow investors to passively benefit from this growth.

BRIC ETFs are excellent ways to diversify the investment portfolio. They are also believed to offer better returns than ETFs tracking NYSE and S&P; or American and European markets as a whole. Different BRIC ETFs may have different weightage for different countries; for example Claymore BRIC ETF (EEF) has the following allocation proportions - Brazil 46%, Russia 5%, India 13% and China 36%. Apart from tracking the securities traded in BRIC exchanges, many BRIC ETFs also track stocks of BRIC countries traded in American and European markets.

Many investors consider BRIC ETFs as an alternative way to profit when the dollar and US economy are weak. BRIC ETFs usually have higher expense ratios than traditional ETFs. They are also considered risky as the political climate of these nations can change drastically. The recent recession, which hit these economies too, has also raised some concerns over these economies. The decoupling theory of emerging markets, which stated these economies will grow independently, has also proved wrong so far.

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The Week Ahead: Investors were spooked by a falling consumer confidence number while personal income and spending data showed the biggest drop in 10 months. The data continues to flow starting Monday with pending home sales and construction spending. Auto sales arrive Tuesday as the FOMC begins a two day meeting on interest rate policy. The FOMC decision will be announced Wednesday afternoon. Third quarter productivity and jobless claims data are announced Thursday which precedes Friday's all important Employment Report.

Stocks to Watch: Zale Corp. (ZLC) after showing a much larger Q4 loss versus a year ago is undergoing an SEC probe of their accounting practices. Manitowoc Company (MTW) beat earnings estimates for Q3 despite being substantially lower than last year, and Standard & Poors kept a strong buy on the stock. Stanley Inc. (SXE), an IT services firm beat Q2 estimates and year ago levels in their earnings report as the stock pushed back above a declining 200 day moving average. Microstrategy (MSTR) handily beat estimates for Q3 as the stock vaulted to an 18 month high.

Special Note: The S&P 500's decline in October halted seven straight up months as the broad based index tests its October low. Several indexes registered bearish outside down weeks including the Dow Transports, Russell 2000, and S&P 600 Small Cap Indexes where higher highs and lower lows were made than the previous week and closed lower. This candlestick bar pattern is quite often associated with major reversals in stocks and can be considered a precursor for a larger decline than the 9% drop in July despite a 65% rise since the March low in the S&P.

Commentary provided by Barry Ward, Registered Principal, NobleTrading.com, Inc.

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October effect is the belief that the market tends to decline in the month of October. Today this is considered only as a psychological expectation of traders rather than an actual phenomenon. Statistics over the years shows that October is just like any other month. An opposite phenomenon is observed in the month of January known as January Effect, which is more common and is related to tax paying.

The month of October makes many traders and investors nervous as many serious market declines occurred in the month of October. The 1907 panic, 1929 Wall Street crash which preceded the great depression, black Monday and crash of 1987 and the recent 2008 credit crisis occurred in October. Moreover, it is the month of the last earnings season of a year, so prices are expected to fluctuate in either direction.

Statistics of the last 30 years shows that on an average, October is not the worst month of the year, it is September. In the late 90s and early 2000, October was the most profitable month of the year. In 1946, 1957, 1960, 1966, 1974, 1987, 1990, 2001, and 2002 October was also the month which ended some of the major bear markets. One reason for this is, as the phenomenon is widely known and expected, traders are prepared to exploit any decline/sell-off.

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Both In Neck and On Neck are bearish trend continuation candlestick patterns indicating a continuation of an existing bearish trend, after a bullish day. Both are two candlestick formations, comprising a long bearish and (preferably) a short bullish candlestick.


The requirements of In Neck and On Neck candlestick patterns include:

• The pattern should form in a significant downtrend.
• The first day is a long bearish day comprising a long black or colored candlestick.
• The second day is a bullish day where prices open a gap below the first day's closing.
• For In Neck pattern: the second day candlestick closes at or just (barely) above the first day's closing. If the candlestick closes way above the first day's closing, it forms Bullish Piercing Line pattern, a reliable bullish reversal formation.
• For On Neck pattern: the second day candlestick closes below the first day's closing. The candlestick needs to be short; if it is long, it may form Bullish Meeting Lines pattern.

Both In Neck and On Neck candlestick formations occur commonly in downtrends and are considered undeveloped versions of bullish piercing line pattern. As bulls are failing to close trades distinctly above the first day's close, the downtrend is expected to continue, at least for a short term.

Both In Neck and On Neck are moderately reliable candlestick patterns. The bearishness of the formation increases with increase in length of the first day bearish candlestick. Confirmation of trend continuation is recommended.

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