October 2006 Letters To The Editor

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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


PAPER TRADING

Editor,

I just subscribed to your magazine and I was wondering if you have any articles or back issues on paper-trading options and futures.

John

I suggest you start by reading "Getting Started With Options" by Moe Demkovich and Eugene Therot (S&C, October 1999) and its follow-up article "Getting Started With Options Using Protected Positions" (S&C, November 1999). I also recommend "Five Steps To A Winning Trading System" by Matt Blackman (S&C, July 2003). All of these articles are available from the Online Store at our website, www.Traders.com.

Paper-trading is a topic that is mentioned in many articles in our magazine because it is the best way to familiarize yourself with a trading strategy or to gain confidence.--Editor


MODELING THE MARKET

Editor,

Once again, I would like to give public "attaboys" to John Ehlers for his article in the August 2006 S&C, "Modeling The Market = Building Trading Strategies." His model is perfect for my trend confirmation technique.

I have extended the market model by running it through William Golson's [of Equis International] normalization and John Ehlers's inverse Fisher transformation ("The Inverse Fisher Transform," S&C, May 2004).

My resulting code for MetaStock follows, taking off from the last line of the code given in Ehlers's market model code shown on page 23 of the August 2006 S&C:
 

{MODEL}
EMM:=TL+SHP;
{EMM;}
{NORMALIZATION}
PH:= HHV(EMM,LEN);
PL:=LLV(EMM,LEN);
PF:=10/(PH-PL);
V1:=((EMM-PL)*PF)-5;
{INVERSE FISHER TRANSFORM}
IF1:=(Exp(2*V1/100)-1)/(Exp(2*V1/100)+1);
IF2:=IF1/HHV(Abs(IF1),LEN);
IF2;
TS1:=TSF(IF2,LEN/4);;
TS1;
TS2:=TSF(IF2,LEN);
TS2;


In addition to plotting the inverse Fisher transform of the Emm (Ehlers market model), I run a time series of one quarter of the trend length, and one for the total trend length.

I use the final crossover to confirm the trend change. So far, it seems to work great. One note, though: I use a trend defined by price movement to define my trend length. This sometimes results in this formulation taking more data than I have for a particular security.
As always, in the words of J. Welles Wilder: "Good luck and good trading."

Ken Kesler

Editor's note: On a separate but related note, see also the erratum given at the end of this section for the MetaStock code provided in the Traders' Tips section of the August 2006 issue.


THE WYCKOFF METHOD

Editor,

Thank you to your publisher for doing so much work on making the Wyckoff method available. I have been studying the book he edited and am looking for more information to help me master the method (a long way off from now). I am especially looking for help in constructing a position sheet and the wave charts.

I currently use TeleChart for stock scanning and TradeStation for charting. I also have MetaStock, but I simply feed data from TeleChart into it for chart analysis.

My primary questions at the moment are:

1) How many stocks should I follow on my position sheet if my goal is to be a swing trader using mainly end-of-day data analysis following the market close? Is it still the prescribed 100? And how does one go about selecting the 100 stocks? How often do you reselect?

2) How many wave charts should I reasonably create? Is the thinking still five stocks per wave chart?

 I appreciate any assistance/direction that you can give.

Jeffrey M. Calcagni

S&C Publisher Jack Hutson replies:

The material we contributed to our book Charting The Stock Market: The Wyckoff Method was researched and originally published in this magazine about 20 years ago, circa 1986-87, by me and two other authors (David H. Weis and Craig F. Schroeder). Richard D. Wyckoff published his trading course in the 1930s, mostly based on the material originally published in his magazine The Ticker starting in 1908. The book is an easy-to-read summary of his published ideas and method of trading the stock market.

One of Wyckoff's premises is that you should watch the overall industry that a particular stock is part of to better understand a company's relative performance. When trading a stock in a particular industry, try to pick one that has been doing better than most others in the same industry. The number of wave charts that you watch would reflect how diversified your portfolio is, limited only by the amount of effort you want to put into trading. Limiting your trading to one or two stocks in an industry can help force you to diversify your portfolio. Limiting the number of stocks to the top five in each industry, or maybe just those that are active and optionable, should still be effective.

TeleChart's (www.worden.com) stock industry WatchList should work well for you as a source for grouping stocks for wave charts. Daily Graphs Online from William O'Neil & Co. Inc. (www.dailygraphs.com) publishes industry groups that are analogous to Wyckoff wave charts. Wyckoff would encourage you to chart by hand to better get in touch with your stocks.

Position sheets are a record of your past quartile interpretation of the stocks in a wave chart industry list. The use of position sheets should help you grade your aptitude for picking stocks. O'Neil lists 197 industry groups, each containing several to many stocks. The number of stocks as well as industry groups have greatly increased since Wyckoff's time. Wyckoff wanted to systematically eliminate stocks that tended to be marginal in performance and focus more on active, tradable stocks. One hundred stocks may seem like a lot of information, but this represents less than 2% of today's listed stocks.

First, select mostly unrelated industry groups to chart in a wave chart that contains a manageable number of underlying stocks, then select the "best" active stocks within each wave chart to trade. The number of resultant watched stocks needs to be large enough to supply you with a list to hold, buy, and sell from.

If you just want more action, use Wyckoff's methods to trade futures, since they represent industry groups.


FOLLOWUP

Jack,

Thank you for your response. I have set up a position sheet and my wave charts (I am using TradeStation for setting up the wave charts based on industry information from TeleChart). I am working my way through the position sheet.

I currently have 150 stocks on the position sheet and 30 wave charts. This is too much to watch, but it was the only logical breakdown I could come up with at the moment.

My thought process was that the position sheet and the wave charts simply would give me a feel for the market. I didn't think I was necessarily supposed to be trading in the "position sheet" stocks.

Simply put, I took the major industry groups from TeleChart (about 30 or so), found the five most-active stocks (volume-wise, that is) trading at greater than $10 on the NYSE and NASDAQ in each group over the last quarter, put them on the position sheet, and also created wave charts from each grouping of five.

I figured that after following these stocks, I would get a feel for the market and could then inductively decide which groups I should focus on to find stocks. I would then drill down in TeleChart to the stocks in each group and look for targets.

Did I misunderstand in the sense that I should be trading the "position sheet" stocks themselves instead of merely using them for guidance?

I know there are no hard and fast rules here, but I just wanted to make sure I am on the right track.

Jeffrey Calcagni

S&C Publisher Jack Hutson replies:

The point of the exercise you have gone through so far is to create a list of likely stocks to trade. They should be mostly unrelated leaders in their industries. This should help you diversify your portfolio. You should now pick the best-responding of each group to watch for trading opportunities. The resulting, slowly changing list of stocks will give you 30 or so to actively trade. Keep in mind that in the real world, "actively traded" does not mean getting in and out of your positions often, but rather just being ready to do so. Patience pays off.

The Wyckoff method is not the only way to trade the markets, but it is certainly logical and straightforward.


PENNY STOCKS

Editor,

First, is PennyStock Action.com the right website for Sohail Asghar? Second, can you do a in-depth article on trading penny stocks? Do you know of any other penny-stock whizzes?

Aaron Mission

That website is no longer active. We prefer not to do full-length articles on penny-stock trading since it's extremely risky. However, you can apply some of the techniques discussed in our articles to penny stocks if you choose to do so. Since we generally don't make recommendations of services, products, or individuals, we would not be able to provide you with names of any penny stock whizzes.--Editor


QUESTION: METASTOCK CODE FOR WILSON RELATIVE PRICE CHANNEL

Editor,

Please help me resolve a problem I am experiencing with MetaStock (version 9.1) and the Wilson relative price channel indicator, the code for which was given in your Traders' Tips section (S&C, July 2006, page 74).

After entering this indicator into MetaStock, a warning pops up that "This is not a recognized name, constant or operator"

(OB:= Mov(RSI(periods)-Value2,Smoothing,E), and that the program cannot continue.
Golden Wong

William Golson of MetaStock replies:

The formula is correct as published. The error that you are encountering is most likely because you have omitted the semicolon at the end of the line preceding the one that you are getting the error on.

Please let me know if you have further questions.


ERRATA: METASTOCK CODE FOR MODELING THE MARKET

Editor,

After reading John Ehlers's article "Modeling The Market = Building Trading Strategies" in the August 2006 S&C and the corresponding Traders' Tips section of that issue, I noticed a typographical error in the MetaStock code.

The third line of code for the cyclic component should read:

a:=(1-Sin(360/len))/Cos(360/len);
In other words, the first left parenthesis should be moved to the left-most position on the right-hand side of the equation. This is also the case for the sixth line of the code.

Kenneth Metz

Thank you for pointing this out. We have corrected this in the Traders' Tips section at our website, www.Traders.com, and also forwarded it to Equis so they can correct it there also.--Editor


ERRATA: POWEROPTIONS WEBSITE

Editor,

I would like to correct the address given for our website in "PowerOptions WeBlog," which appeared in the August 2006 Websites For Traders column.

In the last line of the first column on page 88, the address PowerOptions.com should have been "poweropt.com." Our website address is www.poweropt.com. The address "PowerOptions.com" belongs to a different company.

Jerry Truppa
Vice President Publishing
PowerOptions
Wilmington, DE

Thank you for correcting this error.--Editor


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Originally published in the October 2006 issue of Technical Analysis of STOCKS & COMMODITIES magazine.
All rights reserved. © Copyright 2006, Technical Analysis, Inc.