PRAISE FOR EHLERS
Editor,
I have subscribed to STOCKS & COMMODITIES
for several years. It is no exaggeration to say I learn new and useful
things from every issue. Many of the things I've learned are included in
the consistently profitable trading method I have coalesced.
I first learned about the work of John Ehlers from his articles in
S&C. Over the past year or so, I have studied and experimented with
the various modifications and applications of the Hilbert transform/dominant
cycle period as put forth by Ehlers. I have become as big a fan of him
as I am of S&C.
I'm enjoying the Hilbert studies I purchased last week. I've selected
a few favorites and converted two of them into show-me studies. They are
a real-time marvel to behold. As an experiment after observing Ehlers's
Hilbert stochastic/RSI/CCI, I built a Hilbert DMI, including the ADX. The
power of accurately measuring the dominant cycle period is very apparent.
They all generate signals within a heartbeat of each other and outperform
the textbook period settings. That includes the market crossing the Hilbert
trendline. The power of measuring the signal-to-noise ratio was the biggest
surprise. The SNR outperformed even the Hilbert ADX and greatly reduced
the number of whipsaws.
My thanks to S&C and Ehlers for the terrific work you do.
Lee Goldberg, via e-mail
We're a fan of John's, too. See his lead article in this issue for another
innovative look at assessing prices. -- Editor
O'HIGGINS TRADING METHOD
Editor,
I have subscribed to STOCKS & COMMODITIES
for many, many years but I cannot recall any space having been given to
the O'Higgins trading method. If you have indeed published it, could you
please advise where I should look in my back issues? If you have not published
it, could you please give it some consideration?
Rudi Genis
Bryanston, South Africa
If any reader has an interest in this topic and would like to share
his knowledge in the way of an article, please contact us for a copy of
our writing guidelines. -- Editor
STATISTICAL SCRUTINY ON LUNAR SEQUENCE
Editor,
In the February 2001 Letters to S&C, Richard McKee noted an interesting
four-day sequence in the moon data. The numbers, including those before
and after the sequence, were: 49.2 42.9 52.3 56.3 59.3 54.7. He suggested
that more study is needed.
I agree that the sequence is interesting, and that more data might
yield more significant results. Possible, but I have my doubts about changing
my conclusions [see Arthur Merrill's letter to S&C titled "Evidence
Needed" back in the December 2000 S&C--Ed.]. The New York
Public Library helped me obtain data on 60 moon cycles, a hefty sample!
My conclusion was that the data didn't give significant evidence
of any influence on the Dow Jones Industrial Average near the full moon.
I certainly stand by that conclusion.
I used the chi-squared test. To qualify for significance, statisticians
like to have at least 80% confidence that a result isn't just pure chance.
They prefer 90%, 95%, 99%, or 99.9%. The largest deviation in the figures
above is 59.3% - 55.0% = 4.3%. Chi-square tells us that you can have only
50% confidence that this deviation isn't pure chance! The data may be accurate,
but the deviations from expectation of any of the four figures in the sequence
certainly wouldn't satisfy a statistician.
Arthur Merrill
Haverford, PA
INDEPENDENT ADVISOR
Editor,
I am interested in becoming an independent advisor to people trading
stocks and options on stocks. I would like to charge a percentage of the
profits as my fee. I am wondering if I could do this without a broker's
license and what kind of regulations would apply if any. Could you advise?
Kyle Evans, via e-mail
You need to contact the Securities and Exchange Commission about becoming
a registered investment advisor. Also, see "Retail Trading Myths"
by Don Bright on page 64 of this issue. -- Editor
ENDPOINT MOVING AVERAGE
Editor,
Here is another word on the subject of moving averages and how to
speed up their response with the endpoint moving average (EPMA). I doubt
that it will be the last word.
As S&C readers know, and as Frank Suler pointed out in the October
2000 issue of S&C in his letter, the EPMA is an excellent least-squares
curve-fit technique. Joe Sharp's article in the January 2000 issue, "More
Responsive Moving Averages," gave a modification to the standard moving
average formula that removes much of the inherent lag. It was based on
an inventory model by Robert Brown in the 1950s. Tim O'Sullivan pointed
out in the June 2000 issue that Brown's formula was identical to the EPMA
described by Pat Lafferty in the October 1995 and June 1999 issues. The
EPMA is the endpoint of the least-square straight line fit to the data.
Don Kraska noted in the August 2000 issue that it is available in an Excel
worksheet via the functions Trend and Linest.
What has not been said is that the slope and endpoint of the regression
line fit to a set of security prices are each just the weighted sum of
those prices. If, say, the security prices are numbered from p(0)
for today's closing price, back to p(n) for the closing price n
days ago, the end point of the regression line, representing the straight
line estimate of today's closing price, is e:
e = w(0) p(0) + w(1) p(1) + .
. . + w(n) p(n),
where the weights w(i) are (4n - 6i + 2)/((n+1)(n+2)),
for i = 0, 1, 2, É , n.
The slope of the line is s:
s = v(0) p(0) + v(1) p(1) + . . .
+ v(n) p(n),
where the weights v(i) are (6n - 12i)/(n(n+1)(n+2)),
for i = 0, 1, 2, É , n.
For example, for n = 5, we get:
i w(i) v(i)
0 0.5238 0.1429
1 0.3810 0.0857
2 0.2381 0.0286
3 0.0952 -0.0286
4 -0.0476 -0.0857
5 -0.1905 -0.1429
This is easily put into a spreadsheet. Let's say that 30 days of
price data are in the first column, labeled A1 through A30. We want to
fit a running six-point line (n=5) to these data, starting, say, on day
9. The last six prices are A9, A8, A7, A6, A5, A4, which become p(0), p(1),
p(2), p(3), p(4), p(5), in that order. They will be multiplied by w(0),
w(1), w(2), w(3), w(4), w(5) to get the endpoint, and by v(0), v(1), v(2),
v(3), v(4), v(5) to get the slope. Let's put the endpoints in column B,
right next to the corresponding datapoints in column A. In cell B9, type
the expression
= 0.5238*A9 + 0.3810*A8 + 0.2381*A7 + 0.0952*A6 - 0.0476*A5 - 0.1905*A4
and hit Enter. Put the slopes in column C, right next to the corresponding
end points. In cell C9, type the expression
= 0.1429*A9 + 0.0857*A8 + 0.0286*A7 - 0.0286*A6 - 0.0857*A5 - 0.1429*A4
and hit Enter. These formulas say, in effect, that the end point
and slope on day 9 are each the weighted sum of the prices from day 9 back
to day 4. Now highlight cells B9 through C30 and click Edit|Fill|Down.
The columns B and C are filled with the end points and slopes of the data
in column A from day 9 to day 30.
Finally, I would note that the formulas for w(i) and v(i) may be
made recursive, as Joe Sharp has shown. But considering the speed of current
machines, I wonder if the reduced computation time justifies the added
complexity in programming. In fact, if you are working in a spreadsheet,
the TREND and LINEST functions are the simplest way to get the endpoint
and slope. The formulas above are most valuable in custom-designed programs.
John F. Bellantoni, via e-mail
Washington, DC
TC 2000 SCAN
Editor,
I enjoyed Gary B. Smith's interview in the October 2000 issue. Inspired
by it, I bought TC2000 and had the same problem that John Wagner wrote
about in the January 2001 Letters to S&C. I could not get it to work.
I e-mailed the Personal Criteria Formula to TC2000 and they said it looked
okay to them; they could not identify my problem. Then I found the answer.
Push the Update All Criteria button after every download. Now excuse me
while I try to find a Gartley setup (very interesting)!
Mac McCann, via e-mail
Sounds like a good follow-up article. See also the response to the next
letter. -- Editor
STOCK SCREENING
Editor,
With all the hoopla about new real-time programs, does any one of
these programs offer an alert system? This question remains untouched so
far or is even avoided. By alert system I mean a system in real-time
programs by which one can find a stock turning up or down in regard to
an indicator by a graphical signal in a list of stocks, not by furiously
clicking chart after chart in a 12,000-plus stock universe.
Chris Pratsch
Houston, TX
There are several real-time programs that offer these features -- TradeStation
2000, MetaStock Professional, and CyBerCorp, for example. -- Editor
MONTE CARLO SIMULATION
Editor,
I read your review of @Risk in the February issue with interest.
@Risk is a versatile risk analysis program. However, your comparison of
@Risk to my Monte Carlo-based EasyLanguage function for fixed fractional
position sizing is a bit of an apples-to-oranges comparison. I wrote Monte
Carlo for the very specific problem of fixed fractional trading, whereas
@Risk is general-purpose.
It is certainly true that @Risk could be used for fixed fractional
risk analysis, but to do so would require setting up an Excel spreadsheet
to simulate fixed fractional trading, including the calculations for rate
of return and peak-to-valley drawdown. It would also be necessary to model
the distribution of trades, as you demonstrated in your review. My experience
with @Risk suggests that many traders would experience a fairly steep learning
curve with this software. Nonetheless, I believe that given the importance
of risk analysis to trading, @Risk is worth a look.
For traders who want a simpler approach to the problem of quantifying
the risk of a fixed fractional trading approach, I invite them to consider
the enhanced version of the Monte Carlo user function offered for purchase
on my website, www.BreakoutFutures.com.
Michael R. Bryant, via e-mail
MONITORING STOCK BASKETS
Editor,
Do you know of any Internet-based software program or a combination
of stand-alone charting/Internet-based real-time datafeed that would allow
me to create and monitor my own stock baskets, updated and charted in real
time? While many programs will monitor the individual stocks within the
basket, I would like to monitor the basket as a whole (as if it were a
mutual fund). Thank you.
Emanuel Schroeter, via e-mail
Try MetaStock Pro's Composites feature. -- Editor
TRADING SYSTEMS
Editor,
I have subscribed to S&C for 10 years. I love this magazine with
all of my heart! In response to the February 2001 Opening Position, I have
also noticed the extinction of trading systems articles month by month.
I think it is related to the fact that buy on dips so far was better than
anything in the brains of the majority of investors. Developing a trading
system requires great effort. After all, why bother buying databases, software,
books, and a PC when you can just get the money in the Nasdaq? Well, not
anymore -- or at least not so easily now.
I believe technicians always shine when there is a bear market because
people want to know where the bottom is. The same thing is true for systems.
Then there's the Internet, not only to sell as you correctly pointed out,
but also to publish. So there is less and less material waiting to be published
in S&C.
Bull markets make investors lazy, and so does technology. Now there
is so much computer power, software, and data with which to analyze, compared
to my Apple II in the late 1980s. I also believe people with ideas -- good
ones -- prefer to trade rather than to make public their approach, so we
see still turtles and volatility breakout systems after all this time.
Check out the book market for investors. After the crash in tech
stocks, there were no more IPOs and no more tech books, but many educational,
discipline, and psychology books -- a market for all seasons. I think there
is a cycle in this phenomenon. Maybe chaos will be back as neural networks.
Maybe there is no more to say on trading systems, but I don't think so.
Maybe this is simply the calm before the storm, where the storm is a major
breakthrough in trading systems development or in time series analysis.
Time will tell. In the meantime, I am thinking about submitting an article
to repay in a modest way all the good things I received over the years
reading S&C.
Riccardo Ronco
London, UK
Still no offerings! -- Editor
TRADING ROOMS IN LAS VEGAS
Editor,
I am thinking of moving to Las Vegas and am tired of the isolation
of my home office. I am looking for a trading room there that I might check
out on my next trip. I would like a place with a bit of a social atmosphere,
where I could lease equipment or set up my own. Could you suggest such
a facility? Perhaps someone on your staff could refer me to a website that
lists these for the whole country? I like to trade both futures and equities.
Any information you can provide would be most appreciated.
I have been subscribing to S&C for about eight months now and
it is excellent! Keep up the good work!
Henry Fiddler, via e-mail
One of the more popular trading rooms in Las Vegas is Bright Trading,
LLC. You can find a list of daytrading outfits at http://www.daytradingstocks.com/training.html.
-- Editor
OPTIONS EXPIRING WORTHLESS
Editor,
I enjoyed Larry McMillan's article in the January issue regarding
the "truism" of 90% of options expiring worthless. As to why
this often-quoted "fact" stays alive, McMillan may have overlooked
one possibility, a typographical error in the original study: 90% of options
don't expire worthless, 90% of options expire worth less.
Keep up the interesting work.
Viktor Brandtneris, via e-mail
GETTING STARTED
Editor,
I just received a complimentary issue of STOCKS
& COMMODITIES. Most of it was way over my head.
Please keep this magazine simpler. For technical articles, maybe you could
tell readers what they should know before they get into the article, or
give more articles, books, and other references. I have several questions.
- Where can I find a list of index stocks like QQQs to buy?
- How do I find out what stocks are in an index and the minimum I
can buy? (For example, the Morgan Stanley REIT index, consumer products
or staples, and electric utilities.)
- Where can I get quotes for an unlimited number of stocks, like an
entire index, and be able to sort on any column without having to download
into a spreadsheet and losing the column I was looking for?
Do any of your advertisers offer a limited version of their product
on a CD?
Thank you for considering my letter.
Ronald Brongiel, via e-mail
Shawnee, KS
You might try our companion publication, Working Money, which
offers educational content geared more for the novice investor. Meanwhile,
a list of index stocks can be found at http://www.amex.com under Index
Shares. Most quote vendors, such as TC2000, PCQuote, and eSignal, provide
the service of monitoring an unlimited number of stocks, as well as being
able to sort them. Vendors such as TC2000 and PCQuote also offer their
products on CD.
ERRATA: READERS' CHOICE AWARDS
Editor,
In the 2001 Bonus Issue of STOCKS & COMMODITIES,
we incorrectly listed the recipient of a Readers' Choice Award in the category
of Technical Analysis Websites. The Honorable Mention recipient, as determined
by reader ballot, should have read DynamicTraders.com from Dynamic Traders
Group, not DynamicTrader.com from DynamicTrader Online. We sincerely regret
the error. Dynamic Traders Group can be reached at 520 797-3668, fax 520
797-2045, dt@dynamictraders.com, or www.dynamictraders.com.
ERRATA: BUFF AVERAGES
Editor,
First, I want to say that your magazine has been instrumental in
teaching technical analysis. I look forward to reading each and every issue.
Keep up the great work.
In the February 2001 Traders' Tips, the MetaStock formula for Buff
averages was incorrect. Thank you for including the algebra in your articles;
it makes it easier to fix mistakes.
Dan Graham
Cobourg, Ontario
Cheryl Abram of Equis International replies:
Here is the corrected formula. It can be written one of two ways:
1
X := Input( "Time Periods",1, 500, 25 );
Sum( V * C, X ) / Sum( V, X )
2
X := Input( "Time Periods",1, 500, 25 );
Sum( V * C, X ) / (Cum( V ) - Ref( Cum(V), -X ))
