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CANDLESTICK CHARTING
Editor,I have been reading your STOCKS & COMMODITIES for several years. You have been doing a great job on keeping us informed about the new trends in the industry. I want to learn candlestick charts. Would you please recommend one or two good candlestick books or video tapes? I really appreciate your help.
For starters, see our interview with Steve Nison in the March 1991 issue of S&C (call our circulation department at 800-TECHNICAL for your options on purchasing past articles). Then, try the books Japanese Candlestick Charting Techniques (New York Institute of Finance, 1991) and Beyond Candlesticks (John Wiley, 1994), both by Steve Nison. Nison has done extensive work in candlestick charting. -- EditorDAVID YEH
via E-mail
THANKS
Editor,I'm a neophyte at commodity trading, and I find your articles well written and understandable.
JOEY WELCH
via E-mail
NAYSAYERS WRONG
Editor,I've been a subscriber for several years and an investor for a few more. You've got a great magazine. This was my first visit to your Web site, which I find well done.
I appreciate your candid opinions in product reviews, as well as any information that can save me time and keep me from undertaking costly trial and error endeavors. It's especially of great benefit when the trading rules are spelled out and the trial results are specified per TradeStation parameters. Next to my Investor's Business Daily, your publication is the most enjoyed.
Two words: Thanks for keeping the politics out of S&C, and although you enjoy the criticism of naysayers, let's see them prove technical analysis as worthless. There are many of us who could prove otherwise, in dollars and cents.
S&C is enjoyable and helps me become a more effective and profitable trader.
MATT BODDICKER
via E-mail
WEB FORUMS
Editor,Thank you for publishing S&C, a truly informative trade journal. I am an independent trader and was wondering if you could give me some information about trading forums and discussion groups on the Web.
Try visiting realtraders.com, sponsored by Kasanjian Research.--EditorFREDERIC PASCAL
via E-mail, France
LO AND BEHOLD
Editor,I read with interest your interview with Andrew Lo in the December 1997 issue. It was the first issue of my new subscription. Great magazine.
Andrew Lo writes about the random walk or, in its continuous-in-time version, geometric Brownian motion. As Lo states, if the concept of the random walk is true, technical analysis becomes meaningless. If the concept of the random walk is false, then there are patterns to the price movements in the markets, patterns that can be forecast with some degree of accuracy through applied mathematics.
Accepting the validity of technical analysis, therefore, makes the movements of the markets an incredibly complicated, almost unpenetrable mathematical phenomenon. The higher we go in the world of mathematics, the closer we come to the archetypal world of imagination and our own sense of intuition. This is the world Einstein worked from. This is the world of W.D. Gann's vibrations.
If we accept that there are patterns to market movement, if we accept technical analysis as valid, we must also accept as valid the idea that understanding the movement of the markets can conceivably be approached by way of pure intuition. Any mathematician/musician would agree. The markets are like long, jazz pieces, full of riffs and counter riffs and echoes and variations in endlessly creative variety. A price pattern this month could be echoing a yearly price pattern from seven years ago. Like a great jazz musician, a great trader can have a sense for the flow, he can recognize variations on themes already introduced. He steps in and places his trade.
It is possible to feel your way into the flow of the markets intuitively. Read the papers for general news and financial news. Get the prices daily, end-of-day or real time, downloaded into a good charting program. Your work every day is simply to read the world and national news, watch the news on TV to see what makes it from the paper to the screen, read the broad financial news, watch the financial channel at five or six o'clock, and, most important of all, spend an hour looking at price charts for seven commodities of your choice.
Make printouts of them so you can hold them in your hands. Day charts for the past month. Lay them out in order on the floor and look at them. One-month charts for 18 months back. Lay them out on the floor and look at them. Compare the patterns with the day charts. Do three-month charts, six-month charts. One-year charts, two-year, three-year, five-year, 20-year charts. Don't try to figure anything out. Just look and move them around. Trace interesting patterns with your finger. Do it again the next day.
If this appeals to you, do it every day for two years. You'll be trading the markets with the best of the best. You'll be trading the markets with soul. This is a realm that computers cannot penetrate.
Andrew Lo's interview was great; he is doing focused, interesting work. It is important to remember, though, that Lo's interest in the markets is tied to academic mathematics. For him the challenge of the markets lies in this direction. But Lo's very acceptance of the challenge to find the rhythms of the markets through mathematics reminds us that there is another path to the same seemingly impossible task of penetrating the secret flow of the markets. And this second path is imagination and intuition, an approach that can serve to fructify and potentiate the technical method of analysis.
Thank you for your comments and opinion. --EditorMICHAEL REIS
via E-mail
WEB SITE
Editor,Your Web site is an excellent companion to the magazine. Thanks to Technical Editor John Sweeney for bringing it to my attention in his helpful and informative article in the latest Bonus Issue.
TERRANCE SUMMERS
via E-mail
SMOOTH WORK
Editor,Many thanks for Tim Tillson's article the January 1998 S&C ("Smoothing techniques for more accurate signals"). I programmed T3(n,v) in Excel and then watched T3 vary versus the underlying stock time series on the graph as I changed n and v. I am impressed with the potential of this smoothing function and will be trying it out in my stock trading program.
It is articles such as these with fresh ideas that make S&C such an great publication. Thanks again and hope Tillson will share more of his ideas in the future issues.
JOHN ISHAM
via E-mail
SMOOTHING TECHNIQUES
Editor,I have a question regarding Tim Tillson's January 1998 article "Smoothing techniques for more accurate signals," where the graph in Figure 2 on page 69 depicts an EMA(11) and an EMA(3)5 (a "quintuple-smoothed" EMA(3)). These EMAs were described as both having a lag of five days. I noticed that in comparison to the EMA(11), the EMA(3)5 seemed to lag most of the turning points by about an additional day.
The "phase lag" Tillson mentions may be the most mathematically accurate, but based on the graph I began to wonder about the application to trading if the actual lag behind turning points was not being accurately measured.
To measure lag, I constructed a simple horizontal line interrupted by an artificial top that rose with a 1x1 slope up 10 days, and then back down for 10 days. By this methodology, the EMA(11) tops out three days behind the actual peak, and the EMA(3)5 has a lag of four days, which confirmed my suspicions.
In addition, I wanted a measure of the smoothness of the line, so I made an attempt to measure noise reduction. I again used a simple horizontal line (no top this time) and added a small amount of random noise to each point. For each type of smoothing, I measured the average absolute difference from the horizontal line. Here, the EMA(11) showed slightly greater noise reduction than the EMA(3)5 (with less lag).
By these measures, I found the basic EMA outsmoothes simple, weighted, triangular, and double exponential averages, for any given amount of lag. Or to put it another way, the EMA has less lag for a given amount of smoothness.
Tim Tillson replies:ERIC GATLEY
via E-mailBoth EMA(11) and EMA(3)5 have five days of lag with respect to linear input, but you correctly point out that EMA(3)5 does have more lag when the input has spectral content (such as a sine or sawtooth wave).
The compensation for this extra lag is that EMA(3)5 is much less noisy than EMA(11). I computed both on over two years of Hewlett-Packard [HWP] closes, then took the one-period rate of change of each. I then divided the number of days of data by the number of times each derivative crossed the zero line. EMA(11) had an average of 5.653 days/crossing, where EMA(3)5 had an average of 11.4 days/crossing, meaning that it is about half as noisy (in terms of potential trading whipsaws) on real data.
TIME AND OPTIONS PROBABILITIES
Editor,I've recently subscribed to S&C and am enjoying it. I've used technical analysis for many years, but am definitely a novice. I challenge myself to learn something from each monthly issue. I read the article "Time and options probabilities" in the December 1997 issue with great interest. I've used call and put options to enhance my income and would like to begin using probabilities to help me choose which options best fit my requirements.
Here is my question: You show a call selling for 1/2 to 3/4, which you state as 55% volatility. How is this "implied volatility" for the Dell example calculated? I'd like to begin using the method, but I can't until I understand this calculation.
Please be sure and check the February 1998 Letters to S&C for an erratum on this article.DAN MILLER
Austin, MNImplied volatility answers the question, What volatility do you need to input into the Black-Scholes model to arrive at the current price of the option? Hence, the name implied volatility. For more information, see Options as a Strategic Investment by Lawrence G. McMillan (3d edition, Simon & Schuster New York Institute of Finance New York, 1992). --Editor
TIME SERIES ANALYSIS IN SPREADSHEETS
Editor,First, I hope you will encourage the folks at the software firm Equis International to continue giving formulas in the older MetaStock version 6.0 format as well as in the new. I've had the program for less than two years. Sure, you can now put 2,500 characters in a formula, but why would you need to?
In addition, I'd like to see more articles on using a spreadsheet for price series analysis, as you did in "Pattern recognition in time series" in the January 1998 issue. Would you know of a book specifically on this subject or a book with this subject included in it?
Thank you for your feedback. Different users need different levels of sophistication in a program, and software developers try their best to accommodate many different levels of users.R. ROEGNER
via E-mailAs to price series analysis, we are not aware of any books on time series analysis using Excel or other spreadsheets. --Editor
ERRATA: SOFTWARE COMPARISON
In the Software Comparison feature in our 1998 Bonus Issue, a price was listed incorrectly. The price of Greg Morris's Systems & Indicators package, an 11-volume set, is $359.95. Single volumes are $49.95 each. The package is available exclusively from Wall Street Software, 6212 Samuell Blvd., Suite 317, Dallas, TX 75228-7119, 888 977-3472 or 214 388-9860, fax 214 388-9831, E-mail wallst@fastlane.net, Web site https://www.fastlane.net/~wallst.
ERRATA: Z-SCORE
Editor,I believe that the formula for Z-score on page 16 of the January 1998 issue is in error ("Profiting from the Z-score"). It does not give valid results.
Using shareware I downloaded from moneyware.com gives different value for the Z-score.
Mike DeAmicis-Roberts replies:BOB WOLFE
via E-mailYou are correct that an error appeared in the formula. The formula in the article flattens out to:
whereas the correct formula flattens out to:Z-score = (N * (R - 0.5) - X) / ((X * (X - N)) / (N- 1)0.5It should have appeared in the magazine thus:Z-score = (N * (R- 0.5) - X) / ((X * (X - N)) / (N-1))0.5I apologize for the inconvenience and thank you for bringing it to my attention.
