MECHANICAL SYSTEMS

Editor,
Excellent article on the relative strength index by John Sweeney in the September 1997 issue! Has STOCKS & COMMODITIES published any articles on mechanical systems using relative strength index (RSI)? Can we look forward to future articles from John Sweeney on on-balance volume (OBV) and moving averages (MAs)?

BROOKS RIMES
via E-mail

See this issue for an article on the on-balance volume by Technical Editor John Sweeney. Moreover, see my article in the upcoming November 1997 issue for an article on using RSI as an indicator of trend.-- Editor

GREAT COVER ART

Editor,
I have read your magazine for several years and truly enjoy reading your articles. You come up with some very interesting and original magazine covers. I would like to use a copy of the cover as a desktop pattern on my trading PC, and change it every month when the new issue comes out. Would you post the cover art on your Web site so I may save it as a JPEG image? Just another way to express my PC as a fun and exciting trading instrument.

Keep up the great work!

CHRISTOPHER T. FENNELL
via E-mail

Thank you for your complimentary remarks. Using the S&C cover as a desktop pattern is an interesting idea. A copy of the current S&C cover is displayed each month at our Web site at www.Traders.com. Of course, reusing portions of a copyrighted publication for personal and internal use is permissible; reusing with the goal of redistributing is illegal. -- Editor

NO HOLY GRAIL

Editor,
I hope that the very interesting interview of Larry Williams (STOCKS & COMMODITIES, July 1997) doesn't condemn technical analysis to failure relative to a Holy Grail trading system -- or that such a system cannot exist. Rather, I recall that an English scholar, at the turn of the century, said there wouldn't be any more major discoveries in science because everything had already been invented. I hope and expect there will be a tremendous breakthrough in technical analysis techniques, resulting in a 99% accurate Holy Grail trading system.

B. CAMPBELL
via E-mail

I will hereby go on record and state that a Holy Grail trading system does not and will not ever exist. Why? Because the market evolves for many reasons, and therefore isn't a static entity. A trading system, meanwhile, is a static approach, and by definition has rules. If it didn't, how could you determine the validity of the approach? Thus, the trader's goal is to develop a reasonable approach and backtest it thoroughly to ensure that it's functional on a historical basis. Thorough backtesting also gives the trader the confidence to stay with the system through the difficult but normal drawdown periods.

Finally, there simply is no single right indicator or system for everyone; your search for the right indicator or system for your own needs may take you down a different path from that of another trader. In the meantime, we'll keep presenting information that may help readers discover tools that work for them. Good luck. -- Editor

MEASURING OPTIONS WITH DELTA

Editor,
Jay Kaeppel's July 1997 article, "Selling vertical credit spreads," was very instructive. I'm relatively new to the futures options trading game. I found one statement in Kaeppel's article extremely valuable, and I just want to make sure that it is indeed true. In the article, Kaeppel stated that "a delta of 35 implies that there is a 35% probability that the option will expire in the money." I thought delta was only a measure of the distance the option would move in relation to the underlying, and a delta of 35, for example, would mean that a call option would move up 35 points for every 100 points the underlying moves. Can you really use the delta to rank the probability of an option expiring in the money?

RICH RIGGS
Hayward, CA

Jay Kaeppel replies:

A delta value can be calculated using an option pricing model for each individual option. The delta value can range from 0 to 100 for calls and from zero to -100 for puts. The significance of a particular option's delta value can actually be viewed in three different and instructive ways: a) The delta value for a given option is a rough estimation of the probability that the option will expire in the money. Thus, an option with a delta of 20 has a 20% probability of expiring in the money. b) Second, a delta value of 20 implies that if the underlying stock increases one full point, the option will increase in value by 0.20. c) Third, a delta value of 100 indicates that the option position is currently the equivalent of holding 100 shares of stock (or being long one futures contract). Thus, buying a put option with a delta of -40 means the position is equivalent to being short 40 shares of the underlying stock (or being short four-tenths of one futures contract).

A trader looking to write options with a high probability of expiring worthless may focus on the first choice above. A trader looking for a specific size move in the underlying may focus on the second approach described above. A trader looking to hedge a position or achieve a particular underlying equivalent position may focus on the third view. Traders should remember, however, that delta values are not static and will change based on changes in the price of the underlying security and the passage of time.

FINANCIAL ASTROLOGY

Editor,
I read the June 1997 STOCKS & COMMODITIES with great interest. The topic of financial astrology showed up in three places in the same issue: your Opening Position, the Quick-Scan of A Traders Astrological Almanac, and in the article by Jeffrey Katz ("Lunar cycles and trading"). Considered together, I took this as an indication that there may be something to financial astrology, so I thought your readers might be interested to know of my findings.

A decade ago I contributed "In search of the cause of cycles" to STOCKS & COMMODITIES (March 1987). In it, I presented facts that suggested the heavenly bodies do affect markets. Since then, I have contributed many other articles to S&C, which I feel help give newcomers an introduction to what I call market astrophysics, rather than financial astrology. The difference is I've focused on understanding the physical sources of the effects that cause the wild psychological swings in markets.

What I have found is that the earth's electromagnetic field is the link between the planets and emotions. The field is created by the flow of charged particles from the sun. This flow is modified by the rotating planets. This electrical field causes a current to flow through our bodies at about 2,500 trillionths of an ampere. A 100-watt light bulb takes one ampere. Our brain uses currents on the order of just one trillionth of an ampere. Thus, our brains feel those surges of current in the earth's electric field. We feel them as emotions. And we trade on emotion.

Following this line of research has taught me that much of financial astrology is valid. But I have also learned that it alone is not enough to base trading on. These changing currents set up overlapping waves. The waves create the patterns seen by technical analysts. These waves are competing -- when they are of equal strength, prices congest. Then chaos theory comes into play. When strong forces balance, a weak force can tip the balance, leading to a fast move. It is these streaks that I search out for good trades.

Over the years, I have found that it takes three things to succeed as a trader: knowledge, patience and discipline. Knowledge of planetary effects is widely available and should be in the research path of every serious trader. We all have more to learn, so I encourage you to continue to publish articles presenting research into planetary effects.

HANS HANNULA
via E-mail

Thank you for sharing your ideas and theories.

Hans Hannula's articles may be found in past volumes of Technical Analysis of STOCKS & COMMODITIES. All past articles are listed at our Web site in the back issue archives, and past volumes, which are available as softcover handbooks, can be ordered via our Web site (www.Traders.com) or by calling 800 832-4642.--Editor

TRADING SANS COMPUTER

Editor,

I wish to take issue with Peter R. Anderson's comments (Letters to S&C, August 1997) regarding Gary Smith's article on day trading stock index futures, which appeared in the May 1997 issue.

Like Anderson, I am an active stock index futures trader and the only reason I am well ahead of the game is because of what I have learned from Gary Smith. A lot of what Smith says goes against the mainstream of thought, which tends to excite people. I guess we can add Anderson to that list.

It seems that his main complaints are that Smith is against computers and that he is not purely a mechanical trader.

However, nothing I have read indicates that there are more successful future traders today than there were before computers became commonplace. Most people still lose money despite their use of fancy trading programs for the computer. My experience has been that there are legions of people out there crunching out reams of numbers with their Pentium chips who have nothing to show for it but brokerage statements dripping red ink. Gary Smith has been making money trading stock index futures for more than a decade without a computer. What's more, he's able to prove his track record with brokerage statements, unlike so many self-professed experts.

I will agree with Anderson that most people do better trading mechanically. There are some traders, however, who are able to trade subjectively, and many supertraders fall into that category. It's a level of trading I aspire to, because virtually every mechanical system eventually breaks down.

WAYNE LANNIN
Salem, OR

ERRATA

The price of the Minitab Statistical Software package reviewed in the September 1997 issue of STOCKS & COMMODITIES was listed incorrectly. The correct price is $895.

In our September 1997 interview with Steve Shellans, the tables under the graphs on pages 70 and 72 were inadvertently switched.

Finally, in the sidebar to "The TD Range Expansion Index," on page 46 of the August 1997 issue, the second to the last paragraph in the sidebar should have read:

"Finally, the five-day TD REI is the ratio of the sum of the last five days of column J divided by the sum of the last five days of column K. This ratio is then multiplied by 100 for scaling purposes."

We apologize for the errors.

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