July 1999 Letters To The Editor

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WYCKOFF METHOD USEFUL

Editor,

I recently finished reading your wonderful book, Charting The Stock Market: The Wyckoff Method, and am sending this letter to thank you for publishing it and for making it available at a very reasonable cost. Economy isn't everything, but in this arena, spending hundreds of dollars for books and products, replete with appeals to human greed and promises of ease of gain, is not uncommon. I also appreciate the fact that your book consistently states that this method offers no magic formula or indicator, but rather presents itself as an aid to navigation of the market.

I've found that this study of market behavior has helped me to evaluate the validity of various technical indicators, and how they might be used in conjunction with one another to develop high-probability trading setups. With further testing, I might discover easier combinations of studies.

While I continue to employ sound risk control and avoid euphoric trading, I have already begun to see some performance improvement, thanks to what I have learned from Charting The Stock Market. The chapter on the method in action was helpful in that I was able to read between the lines and discover that in the futures market, much like the stock market but faster, 45-minute time bars are a very valuable tool. I have also learned to compare charts of various time periods and point & figure with each other.

I wish you continued success in your mission of educating investors and traders. In my estimation, you are winning the game.
 

Rodger D. Kurth

 

 

Chicago, IL



INFORMATION SEARCH

Editor,

Would you know of a weekly newsletter called Technical Trends, published by Arthur A. Merrill? I recently read a reference to this newsletter dealing with stock market analysis but have never seen any information about it. I was wondering if you might know where I could find this.

Paul A. Davis, via E-mail
Technical Trends, originally published by Arthur Merrill, is currently published by John McGinley. Contact him at PO Box 792, Wilton, CT 06897, (203) 762-0229 or (800) 736-0229, E-mail him at JMcGoo@juno.com, or gather all the details on subscribing to Technical Trends at https://www.capecod.net/techtrends/index.htm.

Arthur Merrill contributed many articles to STOCKS & COMMODITIES over the years, and as fate would have it, we just received the following letter from him.-- Editor


MORE DESCRIPTION NEEDED

Editor,

Congratulations on the continued high quality of your selection of articles.

I was frustrated by a couple of things in the May 1999 issue:

Regarding "The Endpoint Fast Fourier Transform," this article went over my head, since I donÕt know how to do the fast Fourier. You listed several suggestions for further reading. Does one of these go through the process step by step, taking me by the hand from the beginning to the answer? If so, how can I get a copy?

Regarding "How To Get Started In Electronic Day Trading," this article has some good suggestions on how to trade profitably, but it doesnÕt start at the beginning. When I sit down to my computer, what keys do I press to start trading? Do I have to start by buying a program? The article mentions, without adequate description, terms such as direct access system, small order execution system, electronic direct access trading, SelectNet, Archipelago, Bloomberg, Ready system, EDAT system, Level II screens, Supermark, and Optimark.

I believe an article that describes these terms, what they do, and how to get there could be very useful.

Keep up the good work!

Art Merrill

 

 

Merrill Analysis
Haverford, PA


Good to hear from you, Art. (At age 90, youÕre still as sharp as ever!)

Regarding Fourier analysis, two 1994 STOCKS & COMMODITIES articles -- "Optimizing Momentum" by Anthony Warren and my article "Preprocessing Data And Fast Fourier Transform" -- will take you step by step through preprocessing data and using Fourier analysis in a Microsoft Excel spreadsheet, although it helps if the reader is familiar with the previous articles on Fourier analysis published in STOCKS & COMMODITIES by Warren and S&C Publisher Jack Hutson in 1983. These were the S&C articles given in the references in the May 1999 issue. Another reference given there,

Press, William H., et al. [1993]. Numerical Recipes In C: The Art Of Scientific Computing, Cambridge Press

is especially recommended by Dennis Meyers, the author of the May 1999 "Endpoint" article, for the code to perform fast Fourier transforms. (See also the next letter for more on this topic.)

Past articles can be purchased as part of our annual book compilations ($29.95-$69.95, depending on the year) or as part of our S&C on CD ($395 for all 16 years). By next year, we plan to offer articles for sale in packets of 10 by CD-ROM. Individual back issues are available for $8 for current and recent years only. Call us at 800-832-4642 (800-TECHNIC) for more information.

Regarding electronic daytrading, see our Traders' Notes entries elsewhere in this issue for an explanation of each of the terms you list. Thanks for writing! -- Editor


MAXIMUM ENTROPY

Editor,

As a day trader, I've always been interested in your quantitative approach to trading. Your seminal articles on maximum entropy in STOCKS & COMMODITIES have been especially intriguing, and I want to use this method for timing purposes.

Is the BASIC code you first introduced in 1983-84 in S&C available somewhere in an Excel or Visual BASIC format? If not, is it possible -- using Excel -- to discern the power spectrum of a time series by using the fast Fourier transform on the discrete autocorrelation function, then developing the coefficients of the linear prediction model?

Is this a sound approach, or can you recommend an alternative? I look forward to your response.

John Garland, via E-mail
Analyzing historical data for possible tradable cyclic content can be done with either fast Fourier transform (FFT) or maximum entropy method (MEM). FFT is an appropriate tool, with many historical datapoints, for designing a data filter that can be used to signal trades. Mem can be used with less historical data and is thus sometimes used to predict short-term cycles. Both techniques require some understanding of their limitations.

Most software implementations of these algorithms require that the user fully understand their use. Some versions of the Microsoft Excel spreadsheet application have an FFT add-in, but you must know how to properly preprocess your data or you'll get garbage for output. The versions of FFT and MEM that Warren and I published in the early 1980s are written in BASIC and also include data preprocessing. In the April 1994 issue of STOCKS & COMMODITIES, Warren and S&C Editor Thom Hartle revisited the topics in "Optimizing Momentum" and "Preprocessing Data And Fast Fourier Transform," respectively, the latter of which also contained a sidebar implementing data preprocessing and Fourier analysis in Microsoft Excel. All these articles and more are available in book form and on S&C on CD.

A commercial implementation of MEM designed for traders is sold by John Ehlers as MESA (Maximum Entropy Spectral Analysis), www.mesasoftware.com. -- Publisher


CANDLESTICK CHARTING

Editor,

I'm an account executive with the Orion Futures Group in Tampa, FL, and we have a handful of clients who enjoy trading. I was wondering if you already have an article or would publish an article about candlestick trading. ItÕs difficult to find learning materials on the symbols. If you offer something that defines candlesticks, I would appreciate it.

I recommend that traders subscribe to your periodical because of the depth with which you study and analyze markets. Great job!

Eric Crenshaw, via E-mail
We've published a number of articles on candlestick charting. One is "Candlesticks And Stochastics" with sidebar "Pattern Explications" by Greg Morris in the August 1991 STOCKS & COMMODITIES. Another is "Three-Line Break Reversal Signals" by William Arnold in the October 1997 S&C. We interviewed Steve Nison, who first popularized candlestick charting in this country, in the March 1991 issue of S&C. (Call our Circulation Department at 800-832-4642 for your options on purchasing past articles.)

Books on candlestick charting we'd recommend include Japanese Candlestick Charting Techniques (New York Institute of Finance/ Simon & Schuster, 1991) and Beyond Candlesticks (John Wiley, 1994), both by Steve Nison. -- Editor


CONSTRUCTING POINT & FIGURE CHARTS

Editor,

I am a subscriber to your magazine. I hope you can help me to clarify a doubt I have about the use of point & figure charting.

All books I have studied about this technique say that P&F charts are plotted on an arithmetic scale with each square below $5 having a value of 25 cents. Squares between $5 and $20 are valued at 50 cents each, squares between $20 and $100 represent $1, while on higher-priced securities from $100 up, each square is valued at $2. What I need to know is, how I can plot P&F charts on Italian markets, where securities are in Euros?  In other words, I would like to know how the relationship between securities and square value change, if a similar relationship exists between security value and square size, and how I can find it out.

Renzi Massimiliano, via E-mail
For help with your question, I suggest contacting The International Federation of Technical Analysis, https://www.ifta.org, or the Società Italiana di Analisi Tecnia, https://www.siat.org. -- Editor

DAYTRADING SOFTWARE

Editor,

Have you done a comparison of different trading software, including real-time quotes, for ease, completeness, and cost?

Jim Masterson, via E-mail
We have not compared real-time quote services. We do review software and technical analysis programs each month in STOCKS & COMMODITIES, and we offer a technical analysis comparison feature at our Website, where more than 200 technical analysis programs are listed. The table at our Website lists the features and costs of each product, and you can use the search engine on that page to search for products with certain criteria. -- Editor


MATH RESOURCE

Editor,

I love the Traders' Tips section of your magazine, but as a novice trader, I struggle to grasp the full implications of what I am keying in.  Can you suggest any books that would provide both the math concept(s) and the relational issues between the all the Ks and Ms?

David M. Gray, via E-mail

 

 

North Sydney, Australia

Pick up a math handbook and a statistical textbook from a university bookstore for references on math concepts. In addition, we'll repeat some suggestions for classic reading on technical analysis that explain the concepts behind some of the indicators:

Colby, R.W., and T.A. Meyers [1988]. The Encyclopedia of Technical Market Indicators, Dow Jones-Irwin.

Meyers, Thomas [1989]. The Technical Analysis Course, Probus Publishing.

Murphy, John J.  [1997]. The Visual Investor, John Wiley & Sons.

Pring, Martin J. [1985]. Technical Analysis Explained, McGraw-Hill Book Co.

Schwager, Jack D. [1996]. Schwager on Futures: Technical Analysis, John Wiley & Sons.

And of course, keep reading STOCKS & COMMODITIES, and keep checking the Novice Trader's Notebook at our Website, www.traders.com, for new entries!-- Editor


SHARE-BASED TRADING MODELS

Editor,

I started to read the May 1999 article by Jack Schwager in STOCKS & COMMODITIES, "Using A Constant Investment Size For Stock Trading Systems," because I like the way Schwager writes.  However, it didn't take long to realize that he is describing a problem (share-based trading models) that should never exist for readers of your magazine.  The constant analysis of the faults of the Dow Jones Industrial Average construction over the past 50 years or more have made these problems clear to all thinking analysts.  While it is possible some novice will still take this approach, I find it impossible to believe that any serious reader of S&C would.

Robert B. Peirce, via E-mail
Each month I aim to meet the needs of both the novice and the professional trader. In fact, the greater challenge is not letting the novice conclude that S&C is over his head. -- Editor


ERRATA

Editor,

Thanks for an informative article in the May 1999 "On-Balance Volume" by Stuart Evens. The spreadsheet method shows how one might track statistics to more accurately evaluate a trading method.

It appears that equation J4: is a duplicate of I4:. Should it read J4:=IF(H4=1,F3,J3)?

I would also like to suggest that including a filled-in spreadsheet is quite helpful, since it allows one to verify the validity of complex formula. If this is not always possible to include in the magazine, then possibly the spreadsheet could be put on your Website.

George Pitcher, via E-mail
You are correct. The formula for J4 should have read:

J4:=IF(H4=1,F3,J3)

It appears that the results depicted in Figures 5 and 6 in the article used the correct formula.  The error was made when I copied the formula from the spreadsheet to the article.  Thanks for bringing this to my attention.-- Stuart Evens, Staff Writer


ERRATA

Editor,

On page 30 of your April 1999 issue, the formula in column E of the spreadsheet for calculating the ulcer index is given as follows:

=(D3/$C$2)*100

Yet shouldn't this read:

=(D3/$C2)*100

as this would mean the percentage change is calculated with respect to the latest price, not just the first price in the list?

Ben Tristem, via E-mail
You are correct. Thanks for pointing it out. -- Editor


ERRATA

Editor,

In reviewing the published EasyLanguage for the June 1999 Traders' Tips, I noticed I'd made a small error in the EasyLanguage code. It's a small mistake, but it will prevent the reader from being able to verify the EasyLanguage. The change consists of removing SMWA from the list of declared variables. Here's how that section of the function appeared in the June issue:

Variables: Numerator(0), Denominator(0), Factor(180/6), SWMA(0);

 It should have read:

Variables: Numerator(0), Denominator(0), Factor(180/6);
 

Gaston Sanchez

 

 

Omega Research


CLARIFICATION

Editor,

I just noted that in your May 1999 issue you've referenced an old edition of my book on trading systems. Would you please update your future references to Trading Systems & Methods, 3rd edition (John Wiley, 1998)? Thanks.

Perry Kaufman, via E-mail

 

 
 
 

We've corrected it. Thanks for letting us know.-- Editor

Back to July 1999 Contents