September 1997

Letters to the Editor

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WEB FORUM ON TRADING?

Editor,

I'm a longtime subscriber to your magazine and enjoy it very much, including especially the reviews of products.

There is a related need that your Web site could meet while it would be impractical for a periodical. The product reviews in the magazine are good for an overall view of a product but cannot shine a light on many users' everyday experiences with the product, including those annoying or efficiency-wasting implementation issues related to usage and configurations, and intangibles such as ease of living with a product and enthusiasm and depth of support options.

However, a forum on your Web site could provide information of this sort. Such a forum would benefit you, since I'm sure the discussions would generate ideas for editorial content for the magazine. It would also benefit readers, who could swap information and war stories to help make decisions about products. Finally, it would benefit product vendors, who could get feedback from users by monitoring the discussion, if they wished to do so. Please give this idea some consideration.

This idea has been under discussion here for several months. We hope to start a discussion forum about investing techniques and related products sometime in the future.

In the interim, you may want to look at news:misc.invest.technical with a news-enabled Internet browser, or misc.invest.technical with a news reader or online service.Publisher

SYSTEMS REVIEWS

Editor,

Have enjoyed reading your magazine for a number of years. I can also say that some of the ideas put forth in the magazine have proven profitable for me. Over the years, I have ended up on a number of mailing lists and am constantly bombarded with promotions for trading programs. I would like to see some type of evaluation done of these systems. They all promise the moon, but what do they really deliver?

Tracking and reviewing trading systems is an area we don't generally cover at Stocks & Commodities. To properly review a trading system requires a considerable amount of time, because the systems performance would need to be measured over complete market cycles. In addition, the trading rules for many commercial systems are undisclosed (that is, they are blackbox or graybox systems), which means we can't analyze the trading rules behind the signals and that nondisclosure conflicts with our mission as an educational, how-to publication.

On occasion, we do review disclosed systems (for example, see our review of Systems & Indicators in this issue), because the rules and historical results are provided. At Stocks & Commodities we mainly direct our resources toward giving you the tools and know-how to help you develop your own methods. Our editorial focus is on providing readers with the skills to trade effectively. We do review technical analysis software, because software can serve as a tool to help you trade better and more efficiently. Although tracking systems is not part of our playing field, we do encourage authors to send in articles that detail trading systems and that include performance tables. We are happy to publish this type of research.Editor

HISTORICAL IMPLIED VOLATILITY

Editor,

I read with interest your interview with Jay Kaeppel (May 1997 S&C). I found his option strategies particularly useful. Can you relay a good source for referencing historical implied volatility readings on the at-the-money put and call option contracts, as Kaeppel discussed in the interview? I have been unable to track down a good source and am reluctant to try and track the figure myself.

Contact Essex Trading at 800 726-2140, https://www.essextrading.com, or your favorite options software vendor about this specialized data.ÑEditor

TRADING ON THE OTC

Editor, I'm a novice trader and subscriber to your magazine, which is an excellent teaching instrument for young traders like me. I am interested in trading Otc stocks solely. I am told that it is extremely difficult to trade stocks on this market because of the spreads. I am mainly concerned with trading the most actively traded stocks. I was wondering if you have any suggestions or suggested reading materials that would enhance my knowledge in this particular area. Work with a broker who is able to quote you the bid and ask spread listed by the market makers. After a period of time, you should get a feel for the normal liquidity of your favorite issues. As for reading material, I'm not aware of any current titles on Otc trading; check your local library, or maybe a reader can suggest something.ÑEditor

CLASSICAL PHYSICS

Editor,

I have referred to the contents of Stocks & Commodities as being one step this side of astrology. When I started reading the June 1997 issue, my worst fears were realized. In the June Opening Position, referring to technician Bill Williams, you wrote that many of the methods that technicians use are drawn from classical physics, a linear science that does not lend itself to understanding nonlinear systems such as turbulence and living systems. This is absolutely false. Classical physics is not a linear science. All our limited knowledge of turbulence and living things is derived from physics or is obedient to physical principles. I, myself, published theoretical and experimental research on turbulence and its consequence, aerodynamic noise and sonic booms. Further, The Essence of Chaos by Edward Lorenz is a popular exposition of some nonlinear physics. Order Out of Chaos by Ilya Prigogine is a popular exposition of the intrusion of physics into understanding life and its creation. Francis Crick, codiscoverer of the structure of Dna, is a physicist.

The problem is most market technicians don't know any physics or else they might realize how irrational their methods are. The capstone in the June issue is an article titled Lunar cycles and trading by Jeffrey Owen Katz and Donna McCormick. They show that wheat contracts are correlated with lunar cycles except when they are not correlated! Correlations, unless they are very strong, generally mean nothing until a causal relationship can be found. In this case, no causal relationship exists, unless Katz can convince every investor to trade on a loony cycle.

This doesn't mean technical analysis is useless. Technical analysis displays trends based on past history. It works as long as those trends continue. In that sense, it predicts the future. Unfortunately, stock prices are also influenced by future forces, which usually cannot be predicted. At that point, technical analysis fails. That's why I keep reading that a certain system worked until it didn't work. (Failure of technical analysis may, itself, be a good technical indicator.) If only the people who read your magazine knew some advanced mathematical physics, then they would realize that much that is published therein is worthless. It's a case of not being able to see the forest for the trees. I suggest your readers study Innumeracy; Mathematical Illiteracy and Its Consequences by John Allen Paulos for some insight.

Thanks for your comments. Admittedly, I was mistaken when I wrote that classical physics didn't include nonlinear science, when actually physics does and historically has included the analysis of turbulent systems. When I wrote that, I was considering that much research on nonlinear and complex systems Ñ such as modeling the weather or the markets Ñ was performed in this century. Thus, my intent was only to use the term classic as a calendrical reference point; certainly, even modern nonlinear analysis derives from the laws of classical physics.

As to the validity of the technical analysis approach, I believe that whether or not technical analysis fails is in the eye of the beholder and depends on the yardstick you use. Let me explain. Consider the fundamentally based stock investor. A stock price may keep rising as long as earnings keep rising. But when earnings unpredictably come up short, the stock price falls, often dramatically. When that happens, should fundamental analysis be considered worthless? I think not. While my example is an oversimplification, my point is the success of the technical analysis approach should be judged on a relative basis.

I find that many people are critical of technical analysis. If anyone has a method that is superior to those published here, I invite them to submit an article on it. We encourage intellectual discussion in our magazine; after all, we're all interested in discovering profitable approaches that we can successfully replicate in our own trading, and it's only the soundest strategies that will permit us that success.Editor

DYNAMIC ZONES

Editor, I enjoyed the article on dynamic zones (Stocks & Commodities, July 1997). It would have been nice to see the code listed for this exciting new indicator. At the end of the article, I felt like S&C had given someone a platform to sell his trading system. In the future, could you include the system code in full or just state that if you want a copy of the working product you can purchase it from the vendor? Thank you. This is just one of those situations where I'm damned if I do and damned if I don't. In this case, my problem was the authors spent a great deal of time developing the TradeStation code for their technique, and they considered it proprietary research. Still, I found the concept they put forth Ñthe idea that oscillator overbought and oversold bands adjust to recent historical levels and are not static intriguing. So if I had declined to run the article if the code weren't also furnished, my readers would have missed out on the opportunity to consider the approach as they work on their own models. On the other hand, if I opted to run the article without the code, then readers may have viewed the presentation as incomplete.

In the case of this article, the authors' phone number was listed at the end of the article, so readers may wish to contact the authors directly about the code they developed.ÑEditor

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