August 2005 Letters To The Editor
or return to August 2005 Contents The editors of S&C invite readers to submit their opinions and information on subjects relating to technical analysis and this magazine. This column is our means of communication with our readers. Is there something you would like to know more (or less) about? Tell us about it. Without a source of new ideas and subjects coming from our readers, this magazine would not exist.
Address your correspondence to: Editor, STOCKS & COMMODITIES, 4757 California Ave. SW, Seattle, WA 98116-4499, or E-mail to editor@traders.com. All letters become the property of Technical Analysis, Inc. Letter-writers must include their full name and address for verification. Letters may be edited for length or clarity. The opinions expressed in this column do not necessarily represent those of the magazine. -Editor
SWING TRADING
Editor,
After trying VectorVest, TC2000, MetaStock, and other programs, I can't seem to win in swing trading options. I hear AIQ is good, but what is the best software for swing trading? Or am I kidding myself with software? Should I be using a top-of-the-line advisory?
Ken Davis
via emailThe first thing you need to do is spend some time coming up with a strategy that works for you. We have published several articles in the past on swing trading. You may even find code for a swing-trading strategy in our Traders' Tips section at our website, www.Traders.com.
After you find a strategy, then you can think about finding software to implement it, since you'll know better at that point what features you need. If you have already done that without success, then you may want to think about finding a trading mentor who has succeeded in swing trading.--Editor
"AMBIGUOUS" VOLUME SIGNALS?
Editor,
I am writing in response to an article written by Giorgos Siligardos titled "Spike Up The Volume" in your June 2005 issue of Stocks & Commodities. The article takes an interesting and somewhat controversial position on the predictive power of volume spikes.It is true that surges in volume can distort a variety of technical indicators, and most likely will cause some short-term errors in forecasting. The author states that volume can be thought of as direction neutral and that surges in volume can be ambiguous signals. But I would like to point out to the author and to your readers that in the past few years, a body of research has emerged on the topic of volume "surprises." Essentially, a volume surprise is a surge in volume with respect to a certain stock's historical volume averages. If a stock exhibits a level of volume (over a short period of time) that is substantially above its historical average (say, one standard deviation or more), then this is a volume surprise.
I direct the author to a paper written by Kaniel, Li, and Starks titled "The High Volume Return Premium And Investor Recognition Hypothesis: International Evidence And Determinants," which can be found on the Ssrn network (https://papers.ssrn.com). The paper discusses the theory that stocks with volume surprises (either positive or negative) tend to out- (or under-) perform the market in the weeks following the surprise.
The theory is that stocks with volume surprises will get bid up, since the liquidity premium (or the extra discounting on a stock to compensate for the higher risk of illiquidity) declines in the short run. Conversely, stocks with less-than-average volume will get bid down because the market is now attributing a higher liquidity premium to the stock.
The results of the paper seem interesting (and the paper I referenced is one of many), and I have confirmed the results in my own proprietary research in the Canadian market.
In summary, I would question the thesis that volume is ambiguous and would perhaps add that the cost of trading (or market impact costs) is certainly related to volume and, subsequently, to stock returns.
Salvatore Pellettieri
via emailGiorgios Siligardos replies:
Thank you for reading my article and for your recommendation about the paper. I will study it in detail in the near future.
My article focuses mainly in trading tactics and does not imply that a volume spike will not attract investors and traders. This is self-evident. Extremely high volume implies extreme trading activity. The point is that for each seller, there is a buyer, and that a volume spike indicates not only that a lot of people suddenly want to buy the security but also that a lot of people suddenly want to get rid of it. Half of them will be proved right and half of them will be proved wrong. The fact that a security attracts the attention of investors/traders may be indicative of an expecting sharp price move, but it does not itself imply a specific future direction of the market, because technically, we don't know for sure who entered and who left the market -- the experts or the unacquainted. That is what I mean by "ambiguous signals."
During buying (or selling) climaxes at market tops (bottoms), there is extremely high volume, which of course indicates that a lot of people are entering and a lot of people are leaving the market. The high volume in these cases has different implications as far as the future price direction is concerned.
Each volume spike may be viewed as a meeting place of experts with unacquainted traders. The price movement that follows the spike is indicative of what position the experts took. In my article, I proposed the use of support/resistance breakouts as signal generators for trading purposes.
Thank you again for your interest in my article.
S&C READERS' CHOICE AWARDS
Editor,
I am interested in viewing the most recent back issue of your magazine's Readers' Choice Awards. Would you please provide me with the viewing method or web link? Thank you!
David C.
via emailOur Readers' Choice Awards are published in our Bonus Issue every year. This issue is only sent to current subscribers. For information about subscribing, please contact our subscription department at 800-Technical, circ@ Traders.com, or visit our website at www.Traders.com.--Editor
SLOW STOCHASTICS
Editor,
I've been reading some of David Penn's articles in S&C and Traders.com Advantage, and note that he often uses "SS(7,10)" for stochastics. Does "SS" stand for slow stochastics? (I'm using StockCharts.com.) Is SS(7,10) reasonable for any periods (one minute, five minutes, 15 minutes, 30 minutes, daily, weekly, and so on) in any duration? Or is it only good in 30-minute charts? My dilemma is what parameters to use when using slow K or fast K, for that matter. This is a little subjective (as with the other indicators). What would be reasonable for a specific period?
Raul
via emailTechnical Writer David Penn replies: Yes, "SS" does stand for slow stochastic. I note on my eSignal platform that they just have one "stochastic" that I set to 7%K and 10%D with a 4%K smoothing.
I haven't studied the matter systematically. But I've found that a 7,10 stochastic works well on daily as well as 60- and 30-minute time frames. For any market that trends well (or well enough), the stochastic will probably provide some worthwhile clues (especially divergences).
At the longer time frames (that is, weekly or monthly), I've been finding that the Macd histogram (MACDH) works just as well or better for divergences than the stochastic.
I know many traders prefer the fast stochastic. I haven't worked with it a great deal, but it seems like a relatively busy indicator, which doesn't particularly appeal to me.
OPTIONS CHARTING SOFTWARE?
Editor,
I have reread a recent article by David Penn, "Charting Options" (S&C, June 2005), several times and have found it attention-grabbing. So I tried to chart some Oex options using readily available data (like Yahoo! Finance and my online broker). That's where I got stuck.Getting downloadable data on the index itself seems to be no great challenge. However, where do you get the data on the options? I hope it's not necessary to key it in manually from The Wall Street Journal.
I realize that both TradeStation and eSignal are very popular products. Neither of them are inexpensive to subscribe to, especially at the level that includes option prices. I know "you get what you pay for," but I was hoping to get started with this at the "look-see" level first.
I appreciate any input. Maybe there's an online broker I could open an account with that offers this service.
Les Orr
via emailTechnical Writer David Penn replies: I am using Prophet.net. In fact, I have not been able to find software to chart option prices anywhere else.
In his book, Big Trends In Trading, Price Headley uses TradeStation charts for most of his examples. Interestingly, in one option chart (in the small section where he discusses them), the chart is not captioned -- so you don't know for sure what software he used to create it.
My options broker, Optionsxpress, uses Prophet.net charts as well. I'd give Prophet a look.
MECHANICAL BUY & SELL SOFTWARE
Editor,
I have really enjoyed reading the articles and reviews in Stocks & Commodities. I recently read a review of eAscTrend 6.0 Eods (S&C, March 2005) and wanted to ask if there is any other software I should look at that would produce mechanical buy and sell decisions for index and industry-sector mutual funds. I plan to evaluate eAscTrend, but would like to look at a couple of products simultaneously.I tried using the search feature on Traders.com and have looked at the Readers' Choice recent listings, but it looks like most software is a tool for traders to develop their own trading systems. I currently use Excel to do that, so I am not looking for a new development tool but a good, time-tested, mechanical method.
Rick Gage
via emailTechnical Writer David Penn replies: The first software that comes to mind is Investors FastTrack (www.fasttrack.net) -- also called FT4Web. You can view a product description at their website.
I reviewed this product a few years ago ("FastTrack For The Web," S&C, October 2001). Since the developer offers a free 30-day trial, you can take a look without obligation.
ERRATUM
At the end of the article "May Price And Volume Be With You" by Tim Ord in the July 2005 issue of Stocks & Commodities, the wrong website address was printed. The correct website address is www.ord-oracle.com, and the correct email address is tim@ord-oracle.com. We sincerely regret the error and any confusion this may have caused.
Back to August 2005 Contents