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THE MARBLE GAME
Editor,
In the April 1999 issue of STOCKS & COMMODITIES, you published an interview with Van K. Tharp, in which he described a marble game he uses in his seminars to demonstrate the importance of position sizing. That simple paragraph is responsible for completely transforming my trading results.
I had been actively trading stocks for two years with sporadic results and minimal success. My system was outstanding in keeping me out of market downturns, so I should have done extremely well. But in the first quarter of 1999, I actually managed to lose money while the Nasdaq went up 20%.
I was intrigued by the game referred to in the interview, so I duplicated it using some Chinese checkers marbles. Partway through my first game, I came to the stunning realization that I had just made the same mistake that was sabotaging my performance in the stock market. After a short run of winners, I had doubled my position size just in time to double the magnitude of the one big losing marble in the game.
While I was dealing with the complexity of trading the market, I didn't comprehend what I was doing. But in this game with simple rules and fixed probabilities, it was immediately apparent. I reacted to good gains by trading much bigger, which magnified subsequent losses. And after a few losses I traded much smaller, which minimized subsequent gains. I was guaranteeing results substantially worse than the pure probability of success using my system.
I played the marble game dozens of times, charting my performance, until I had drilled some basic position sizing principles into my head. In the past year, since I read that article, my account has gained 50%, even though I was out of the market for several months as a result of major surgery.
That one revelation has already been worth hundreds of times the cost of a subscription to STOCKS & COMMODITIES. Thank you, and please thank Dr. Tharp.
Kristine Erickson, via E-mail
TRADERS' TIPS
Editor,
I am a subscriber to STOCKS & COMMODITIES. What is the easiest way to retrieve past Traders' Tips from your Website?
Eddie Chu, via E-mailThe easiest approach is to use the search engine at Traders.com. Go to Traders.com and scroll down. The search field is on the left-hand side of the page. Type in "Traders Tips" and you will be presented with a list of past Traders' Tips to click on. In the search field, you can also type in a month and year, for example, "Traders Tips July 2000" to go to a specific month's Traders' Tips. -- Editor
MORE RESPONSIVE MOVING AVERAGES AND END POINT MOVING AVERAGE
Editor,
I am responding to the letter from Tim O'Sullivan (S&C, June 2000) about the January 2000 article, "More Responsive Moving Averages" by Joe Sharp.
The end point moving average (EPMA) formula referenced in Pat Lafferty's June 1999 article was first developed and published in a letter of mine to the editor of S&C in February 1996. I developed the simplified formula after reading Pat Lafferty's excellent article on EPMA in October 1995.
In the June 2000 S&C, Editor John Sweeney replied to Mr. O'Sullivan that he particularly liked the simplicity of Joe Sharp's expression in Sharp's article, "More Responsive Moving Averages."
An even simpler approach, using Excel, is the Trend function. If you have prices in column B starting at cell B1 and numbers incrementing by 1 in column A starting with value 1 at cell A1, you can compute the EPMA with the Trend function. If you want to use an EPMA computed over five bars, for example, you would enter the formula below in cell C5, and copy down until the end of the prices. Column C contains the five-bar EPMA values.
=TREND(B1:B5,A1:A5,A5)
An interesting aside is that if you change the endpoint to the midpoint by changing the parameters as follows, still in cell C5,
=TREND(B3:B7,A3:A7,A5)
you will get the same result as taking the centered moving average, on the same row (row 5):
=AVERAGE(B3:B7).
This shows that the centered moving average is a special case of best-fit least-squares linear regression. Of course, this centered moving average cannot provide values for the two most recent bars, whereas the EPMA can. Each has its place in technical analysis.
Another useful Excel function is Linest. This function gives you the slope of the best-fit least-squares linear regression line. If you code on the same row (row 5):
=LINEST(B1:B5)
you will get the slope, or five-bar average rate of change, of the price bars. Rate of change in this manner gives better results than a five-day momentum:
=B5-B1
This is because the five-bar rate of change takes into account all five points, not just the two endpoints. You can also center the slope:
=LINEST(B3:B7)
which is sometimes useful. Smooth rate of change of price can be useful as a leading indicator of turning points. This is one way to get a somewhat smooth rate of change quite easily.
Don Kraska, via E-mail
THE IMPORTANCE OF EXITS
Editor,
I want to tell you that I thoroughly enjoy your magazine. I am fairly new at trading, having only been at it for a year or so, but I have established myself as a swing trader. I haven't got a good enough handle on daytrading yet.
I've found out that trading isn't a get-rich scheme but a steady increase in profits as a result of lots of study and research. Trading is like building a house for investment purposes to sell when completed. You research the demographics; use the best tools so that development can be done faster and professionally; and sell at the right opportunity.
Both building and trading have similarities. Both require spending money, time, and due diligence to reach a profitable goal. Your magazine is like a blueprint that provides a continual education on technical analysis.
I am learning slowly that one of the most important parts of trading is getting out, whether taking profits or cutting losses. I learned from your magazine that sticking to a strategy and staying with the plan is very important. I use a 10% alert (to get out ) and a 40% alert for profit-taking, depending on whether I receive an overbought indication. I gradually move my position as prices rises. This seems to be working for me, but like I say, I am fairly new at this, so if sometime in a future article, would you please talk about getting out of a stock? Keep up the good work!
Elwin Stacey, via E-mail
Alberta, CanadaAs far as what trading takes to succeed, we couldn't have said it any better. Many traders are constantly seeking a Holy Grail of trading. But there is no Holy Grail; there's only hard work, practice, and research to discover the techniques that work effectively for you. In S&C, we try to present a variety of techniques, indicators, and systems that traders can adapt to their own trading, depending on the markets they trade, the time frame they trade in, and according to their personality and style of trading.
Regarding exit strategies, you are again correct that exit timing is just as important for profitability as entry timing. In fact, exit strategies are a main focus of technical analysis, since technical analysis is all about the timing of trades. We've thus published many articles on the topic of exit timing and stop placement in the past, and will continue to do so in the future. Use the search engine at our Website, Traders.com, to locate some of our past articles on exit strategies. -- Editor
NOVICE TRADERS' NOTEBOOK
Editor,
Your Novice Traders' Notebook at your Website is a great tutorial. I've been looking for a place to point people so they can quickly learn technical analysis basics, and this is it!
I've been a "night" or "after-market" trader (four to six trades a night) for a couple months now. I started out reading everything I could on the subject for about six hours a day for two weeks before setting up a month-long practice portfolio, then I went live. I wish I would've found your site early on!
A side question if you have the time: I've been looking for a site that has Equivolume charts... know of any? It's a standard candle chart with the width of each candle determined by volume -- a great way to read charts.
Thanks again for your great work.Brian Hershey
Lancaster, PARegarding sites offering Equivolume charting, we don't know of any but do know of two software products: CandlePower 6 from North Systems and Insider TA from Stock Blocks. Both have been reviewed in STOCKS & COMMODITIES. No sites covered thus far in our Websites For Traders column have offered Equivolume charting. Perhaps someone reading this will know of one. -- Editor
BUYER BEWAREEditor,
In a newsgroup I subscribe to, one of the posts sells software that appears to be illegal copies. The list of trading software that is advertised for sale is endless: TradeStation, MetaStock, and so on, and currently, there seem to be a proliferation of software sellers from Russia to Czechoslovakia [sic]. Most of these bogus software vendors are advertising through newsgroups, and their Websites appear to be a front for selling burnt disks, if they are providing a product at all.
Just thought you might like to know.
Name withheldThank you for sharing these observations that could help our readers to be smarter consumers. We always recommend purchasing items by credit card or C.O.D. whenever possible, so that you have some recourse if the product is not delivered as promised (or not delivered at all).
Laws surrounding the manufacture and sales of software in some other countries are often not as strong as in the US, and pirating apparently can be a problem for US software makers. Buyer beware! -- Editor
TECHNICAL ANALYSIS COURSES
Editor,
In the June issue of S&C there were several letters inquiring about college courses in technical analysis. Clark University in Worcester, MA, offers a course in technical analysis in their MBA and MSF programs in the Graduate School of Management, which is AACSB accredited. I have taught this course in the summer the past two years.
Maurry Tamarkin
Associate Professor of Finance
Clark UniversitySee also the next letter. -- Editor
INTERNET-BASED COURSES ON TRADING
Editor,
I am a student in Spain studying for my CEFA (Certified Effas Financial Analyst) -- this is similar to the CFA designation in the US. I have read in your April 2000 Letters to S&C column about different courses of study to follow in New York or San Francisco.
Do you know of any courses offered over the Internet and with an attendance certificate given at the completion of the course?Enrique de Vidania, via E-mailAccording to a press release we just received from The New York Institute of Finance (NYIF), that university has just launched NYIF Online, a Web-based curriculum of study, with interactive lessons, flashcards, animated illustrations, and real-life instructors providing support and feedback. Quizzes are given as well as a final exam to test comprehension. See Trade News & Products in this issue for more information.
We also suggest you check the Websites of the other universities and institutions mentioned in both our April and June 2000 Letters to S&C columns for Internet course offerings. More and more universities are offering Internet-based study. You might also check the Courses & Seminars listing at our Website, Traders.com, in the Traders' Resource section, for more ideas. Finally, maybe someone reading this will offer more suggestions.
See also the next letter. -- Editor
TRADING COURSES ON WEBEditor,
I have noticed that in several of your recent issues, you have provided a number of Websites that teach technical trading. I can't really afford the kind of advertising that companies have at their disposal, but I am a bona fide college instructor with a Website that teaches trading. Unfortunately, I haven't been able to get the word out sufficiently since I am focusing on college students. My Website is www.TradingCampus.com. I am still in the process of developing the Website for students.
Love your magazine.
Joseph E. Hill, via E-mail
ELLIOTT WAVEEditor,
I have been subscribing to S&C for the past seven months. I like your magazine very much because it gives me a lot of information about the latest technical analysis software.
However, in the time I've subscribed, I have not once seen an article on Elliott wave, so I kindly request that you publish some information about it in a future issue.
Asit Shah, via E-mailThank you for writing. We are always interested in hearing about what our readers want to see in the magazine.
Since most of our readers rely more on indicators than on Elliott wave theory for day-to-day trading, we tend to publish more articles on indicators. However, we have published articles on Elliott wave in the past and will continue to do so. Please visit our the Online Store at our Website (www.traders.com) for past S&C articles that discuss Elliott wave. You can use the search engine to locate articles on the topic. Later this year, we plan to offer individual books with collected articles on various topics, including one on Elliott wave.
In the meantime, maybe someone reading this would be interested in submitting a new article applying Elliott wave theory. -- Editor
READER'S CHOICE AWARDS FOR DATAEditor,
It is with some dismay that I must refer to your last Bonus Issue and the inequity therein.
I have been receiving daily data from Pinnacle Data for some six months and, judging from my experiences, your award of Honorable Mention is completely inadequate. It neither reflects the quality of data -- which, in my limited experience, seems to be wide ranging and very accurate -- nor the level of personal, customized, and unselfish service that I have received.
I don't know what you Americans are used to in the way of service. But that which I have received from Pinnacle Data is, by my experiences in the UK, outstanding. And what do I pay for this every month? $14!
Good data and excellent service. I cannot speak highly enough of them.Paul E. Reed, via E-mail
Northampton, EnglandOur Readers' Choice Awards are based on simple tallies of our readers' votes for their favorite products and services by ballot once a year. The awards are not conferred by the editors. Often, products receiving Readers' Choice Awards are the more well-known products; some smaller or medium-sized companies or lesser-known products simply do not have enough users to garner the votes. As we pointed out in the section's introduction in the 2000 Bonus Issue, the listing can be helpful to let readers know what other traders are using and like, but readers should also evaluate other products, keeping in mind their own special needs. We are glad to hear you found a service that exceeded your expectations. -- Editor
GETTING THE BIG PICTURE ONSCREENEditor,
I just signed up for a subscription to your very helpful magazine. There's lots of useful information in there for me to go on.
I'm looking for a computer that will enable me to display several companies and their individual charts on one screen. I am trying to watch 200 symbols every day, and clicking through all these symbols becomes a chore. Being able to throw up groups of symbols with their charts with one or two clicks would make it easier.
Please let me know if you have come across software that can solve this problem. I would really appreciate hearing from you.
Thank you for your time and for your great magazine!Wilfred Motosue, via E-mail
Honolulu, HIMost technical analysis charting packages give you the option of viewing all your charts, either as layouts or sequentially in a "slide show." Many quote services also offer this feature, as do the direct access brokerage services. -- Editor
MONEY MARKET FUNDEditor,
I am writing about something I feel was left out of your June 2000 review of the Preferred Trade service. I recently began shopping for a direct-access trading system and found that Preferred Trade did not have any money markets to sweep uninvested funds into. It's usually a standard practice today for brokers to offer a money market fund. While this may seem an insignificant issue, let's look at it closer. Currently, my broker's money market yield is 5.1% and my daily average balance in the money market fund this year is around $100,000. This all computes to $5,100 by the end of the year. I imagine I'm not the only person who doesn't mind pocketing that money.
Jason, via E-mailVery good point. We were so impressed with the technology that we overlooked the basics! -- Editor