October 2001 Letters To The Editor
or return to October 2001 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
ERRATA: BALANCE OF POWER
The August 2001 S&C contained an article by Igor Livshin titled "Balance
Of Power." It has been brought to our attention that the phrases "Balance
Of Power" and "BOP" are trademarks of Worden Brothers, Inc.
In the future, we will refer to Igor Livshin's technique as "balance
of market power (BMP)." We regret any confusion this may cause.
BALANCE OF MARKET POWER
Editor,
I read with interest the August 2001 article by Igor Livshin on the
balance of market power (BMP) and decided to implement the indicator. After
some observation, it turns out that all the formulas for this indicator
turn out to be, after making all the summations:
BMP := (C-O)/(H-L)
That's it - the balance of market power is simply the difference between
the close and the open, divided by the daily range. What is most curious,
because it was not apparent during my reading of the philosophy behind
the indicator, is that BMP is the same for the same difference (close-open),
independently of the position of this difference relative to the daily
range.
For example, for a daily high of 50 and low of 48, the BMP is the
same for an open of 48 and close of 48.1, and for an open of 49.9 and close
of 50.0. Instinctively, the bulls were much more on command on the latter
than on the former case, and a Bmp with the philosophy as described in
the article should take this into account.
Anyway, it is much simpler to calculate it as (C-O)/(H-L) than as
the author suggests. Moreover, it is an oscillator, bounded by 1 and -1.
I plotted it as 50+50*Bmp, turning it into a 0-100 oscillator, and it works
quite well and plots nicely like that.
Finally, for such a simple formula, this indicator probably has
another name already... true?
Rui M. Lopes Marques -Palmela, Portugal
See also the next letter and response. -Editor
BMP: NOT WHAT IT SEEMS?
Editor,
In the August 2001 issue of Technical Analysis of STOCKS & COMMODITIES,
Igor Livshin presents "his" balance of market power (BMP) indicator.
He defines "bulls and bears reward," composed of three terms.
But these terms are not independent: With a little algebra, it is easy
to show that there is nothing at all new here.
Using (O, H, L, C) for (open, high, low, close) prices, when C>0,
his BullsRewardDaily is:
(1/3)[BullsRewardBasedOnOpen +BullsRewardBasedOnClose +BullsRewardBasedOnOpenClose]
=(1/3)[(H-O/H-L) + (C-L/(H-L) + (C-O/H-L)]
=(1/3)[(H-O+C-L+C-O)/(H-L)]
=(1/3)[(H-L+2(C-O))/(H-L)]
=(1/3)[(1+2(C-O)/(H-L))]
and, similarly, his BearsRewardDaily is:
(1/3)[1+(O-C)/(H-L)]
Finally, Livshin's BMP can be seen as
Bmp = BullsRewardDaily-BearsRewardDaily
= (1/3)[1+2(C-O)/(H-L)]-(1/3)[1+(O-C)/(H-L)]
=(C-O)/(H-L)
which is a well-known and widely used metric. In the case where C<O,
we get exactly the same result.
Arthur Gelb - Woburn, MA
Igor Livshin replies:
The article describes the BMP indicator, which measures the ability
of two competing groups to push the price to its extremes. The version
of the indicator calculation described in the article uses three distinctive
parts that are used to measure the bulls/bears daily rewards: BasedOnOpen,
BasedOnClose, BasedOnOpenClose. This particular combination indeed can
be finally represented by a simple ratio:
BMP = (Close-Open)/(High-Low)
The above formula should be used for simplified programming and faster
execution, but the final result hides the original physical meaning (which
became compressed inside the formula). As we know, all indicators need
to be tuned to better represent different markets, different time frames,
different securities, and even the same securities under different market
conditions. The full formula presented in the article allows for these
adjustments.
One example of such possible adjustments would be to calculate bulls/bears
rewards based only on two parts: BasedOnOpen and BasedOnClose (and ignoring
BasedOnOpenClose). You always need to backtest several possible combinations
of formulas before selecting the best one to use for a particular security.
Editor's note: See also the Traders.com Advantage article this month
by Dennis Peterson at Traders.com for more on this subject.
FAMOUS TRADERS
Editor,
I like Technical Analysis of STOCKS & COMMODITIES, but would
it be possible to have some information about legendary traders such as
Michael Marcus, Bruce Kovsner, Ed Seykota, Victor Sperandeo, and so on?
Volatility has been decreasing these last three to five years around
most of futures markets, even if most of them are in a bear trend (such
as cotton and coffee).
Some well-known traders made incredible returns in bull markets with
high volatility. Your interview with Victor Niederhoffer (S&C, April
2001) was interesting, but even stars such as him could face serious losses
(a euphemism) as Richard Dennis did last year. What about his legal affair
with Refco?
I would like to know why most of the market wizards are out of the
game now. Some of them retired to enjoy their new lifestyle, but Paul Tudor
Jones, J.W. Henry, Kevin Campbell, Tom Basso, and Bill Dunn are still in
the business.
Franz Kerstens, via e-mail
Thanks for your topic suggestion. Each month in S&C, we present an
interview with a trader or analyst in the industry. This is our forum for
learning more about how successful traders and analysts do what they do,
including their tools and techniques, systems, and morsels of wisdom. Since
we are a how-to magazine and not a news source, we don't report on current
events or the lives of well-known people, but instead write about the techniques
used by different traders to trade and analyze the markets.
Check the search engine at our website, Traders.com, for our past interviews
and for specific traders. We've interviewed more than 100 people over the
years in our pages, including some of the people you mention. Unfortunately,
not everyone gives interviews. -Editor
OPTIONS SOFTWARE
Editor,
I would like to know which is the best software for options, primarily
for futures and the S&P and Nasdaq, regardless of how much capital
you use.
Chris, via e-mail
We do not make product recommendations to individual readers because each
reader will have his or her own needs, and one product can't be everything
to everyone. Instead, we direct you to our product reviews and to our Readers'
Choice Awards in our Bonus Issue for a listing of the options software
that our readers told us they find most useful in their trading.
You can search for product reviews using our website's search engine
at Traders.com. Past product reviews can be purchased through the Online
Store at our website, Traders.com.-Editor
COMMODITIES SCHOOL
Editor,
I'm working at a new company in Brazil that has started to work in
the commodities market. We're working on supplying directly from our Brazilian
sources and would like to send one of our best employees to study the markets
in the commodities area. He means to make some new directions in how markets
works. Can you tell me about some international schools with such a course?
Adriana Belo Maluendas -via e-mail
Contact the Chicago Board of Trade at 312 435-7207 or mung50@cbot.com for
their courses in commodities, or contact another commodities exchange for
any programs they may offer. Inquire also with New York University, the
New York Institute of Finance (800 227-Nyif or http://www.nyif.com), and
with the Institute of Technical Market Analysis at Golden Gate University
(see Henry Pruden's letter below).
Offhand, we don't know which of these institutions may offer courses
over the Internet, but see the Trade News & Products section in this
issue for the online futures course offered by Zoologic.-Editor
WYCKOFF AND BEHAVIORAL FINANCE
Editor,
The editors of Technical Analysis of STOCKS & COMMODITIES deserve
credit for bringing to the trading world a nice balance of the old, tried,
and true on the one hand and the new, innovative, and promising on the
other. That balanced approach was what I also tried to project in my September
1998 interview in STOCKS & COMMODITIES, in which I focused on the Wyckoff
method as the old and classic approach, with behavioral finance as the
new and promising approach to understanding how the markets work.
Two e-mails recently came to my office that add validation to both
the Wyckoff method and behavioral finance. One was in the form of a trader's
personal testimonial lauding the efficacy of the Wyckoff method. The other
reported academic research findings that further validate the concept of
the herd effect shaping market behavior. These research findings lend additional
credence to the behavioral finance framework for organizing and integrating
technical integrators that I espoused in my January 1999 S&C article,
"Life Cycle Model Of Crowd Behavior." The upshot of these two
e-mails is the evidence they provide that the science of technical market
analysis continues to march ahead and that Technical Analysis of STOCKS
& COMMODITIES, The Traders' Magazine, is in the forefront of the advance.
Henry O. Pruden, Ph.D.
Professor of Business
and Executive Director,
Institute of Technical Market Analysis,
Golden Gate University
AROON INDICATOR IN EASYLANGUAGE
Editor,
I recently subscribed to STOCKS & COMMODITIES. I am looking for
the Aroon indicator (or system) written as an .Ela file (for TradeStation).
I could not find it on your S&C on CD. Can you help?
Efi Hecht, via e-mail , Israel
If the EasyLanguage code wasn't provided by the author in the article and
if it wasn't given in the Traders' Tips section that month, then we don't
have it. Please contact TradeStation Technologies at www.tradestation.com
regarding this code.-Editor
NEWS-BASED STRATEGIES
Editor,
Do you know where I can get extensive databases of the dates of past
news articles/reports for markets such as the commodities, currencies,
and stocks (in a macroeconomic sense)? A trader on the IPE here in London
told me last year that his company had bought some software that allowed
one to backtest trading strategies around past news/report releases.
Max Danzig, via e-mail,Watford, UK
Check with some of the data services listed in our Advertisers' Index
toward the back of each issue of S&C, or check out the various data
services described in our Traders' Resource at our website, Traders.com.
Good luck.-Editor
TREND-FOLLOWING VS. ANTITREND
Editor,
I have several questions: First, what is the difference between a
trend-following trading system and an antitrend trading system?
Second, a while ago I purchased The Dow Theory by Robert Rhea
from Fraser Publishing Company (www.fraserbooks.com). On the very first
page, there's a note about 35 plates charting the daily movement of the
Dow Jones industrial and railroad averages from January 1, 1897, that can
be purchased from Barron's book department in Boston.
I tried to contact Barron's about this matter without success.
Do you know of any way to get hold of the charts or do you know of another
charting service that offers historical information about the Dow Jones
industrial and railroad averages?
Calin Ionita, via e-mail
A trend-following system follows and exploits the prevailing direction
of prices. An antitrend method is used to identify reversals when a market
is in a trading range.
As for printed historical charts, check with Chartcraft (30 Church St.,
New Rochelle, NY 10801, 914 632-0422, www.chartcraft.com). Chartcraft offers
long-term historical charts of the Dow Jones indices.
If you don't need the charts in a preprinted format, you could also
check with some of the paid data services as to whether they offer historical
data going back that far that you can plot and print. (Check the Advertisers'
Index toward the back of each issue of S&C or check our Traders' Resource,
Data Services category, for a list of data services.) -Editor
ERRATA: COVERED CALLS
Editor,
On page 58 of the August 2001 S&C, Don Bright made the following
comment: "When I was an options market maker, we loved to do the other
side of [covered call] trades because we would collect interest on the
short stock and then buy the same strike price put. This is called a reverse
conversion and has virtually no risk." I've never heard of a reverse
conversion, but being short a stock and long any strike put - if that's
what he meant - is completely bearish, not a neutral position. If the market
moves up, the short stock is under pressure and the long put loses value
at the same time. Perhaps Bright's memory of tactics as a market maker
have faded or he misspoke, but that strategy is a bearish combo instead
of a hedge.
On a similar note, covered call trading by experienced, knowledgeable
traders is indeed an excellent strategy to profit from sideways to bullish
markets, sectors, or stocks. The cost of doing business via multiple commissions
is a minor consideration if overall results are profitable, bottom line.
Writing naked puts is the mirror strategy and would result in fewer commissions,
but only a small percentage of traders are able to get level-four option
trading clearance from any broker to use this strategy. Bright should have
made note of this stringent limitation to readers who think they should
try that as well.
I would expect a proponent of daytrading who churns vast amounts
of scalp trades not to disparage trading costs such as this. Skilled covered-call
traders adept at picking the right stocks can and indeed do earn +30% to
+100% annual returns with far less effort than trying to win the daytrade
scalping game. Professionals of any industry should be careful not to disparage
or eschew other viable methods they elect not to employ themselves.
Austin Passamonte, via e-mail
Don Bright replies:
Oops! The "reversal" or "reverse conversion" (or
simply a "reversal") consists of a long call, a short put, and
shorting the stock. Having done literally thousands of these trades, I
must apologize for my fingers not typing in what my brain was thinking.
I assure you that my "memory of tactics as a market maker" is
intact; sorry for any confusion!
In addition, the "conversion" side of the trade is utilized
today by many professional traders so that they can have "long"
stock to hit bids with, while maintaining a "neutral position."
The "short" position consists of short calls and long puts, thus
resulting in a neutral position. Then they can simply hit bids on a stock,
buy back the stock (at, hopefully, lower prices) and end up the day neutral
with some additional cash in their accounts.
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