Letters - NOVEMBER 2001

November 2001 Letters To The Editor

or return to November 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

CANDLECODES AND BOLLINGER BANDS

Editor,

I liked very much Viktor Likhovidov's use of Bollinger Bands on an indicator in "Light Up Your Trading System With CandleCode Trading" (Stocks & Commodities, September 2001). Figure 5 on page 26 nicely demonstrates why this technique is so powerful. (Though I am leery -- as I always am of optimization -- of the optimized parameters used later in the article.)

As Likhovidov astutely observes, fixed indicator levels rarely serve well. The markets evolve, and that evolution is portrayed in indicator action; this year, one set of levels serves well, while the next year, another set of levels will be needed. The key to this problem is to employ an adaptive approach such as Bollinger Bands.

P.S. I wish you well in your new post as editor of Stocks & Commodities. I am a big fan of the magazine and I am sure you will uphold its fine tradition of excellence.

--John Bollinger, CFA, CMT

CANDLECODES FOR METASTOCK

Editor,

I am a subscriber and really enjoyed the September 2001 article by Viktor Likhovidov, "Light Up Your Trading System With CandleCode Trading." This is the first time I have heard of this concept, and I'd like copies of Viktor Likhovidov's two previous Stocks & Commodities articles about candlecodes: "Coding Candlesticks" (November 1999) and "Coding Candlesticks II" (March 2001). I also need the MetaStock code for making the formulas for candlecodes.

--Mark Weaver, via e-mail

Issues from the current year are $8 from our circulation office. Contact us at 800-Technical or Circ@Traders.com to order. Articles from previous years can be purchased from our Online Store at Traders.com. The articles there are downloadable Pdf files. For MetaStock code, use the search engine at our website, Traders.com, to search "candle code" and "candlecode" to help locate articles, sidebars, and Traders' Tips giving MetaStock candlecode. Traders' Tips are free to the public; our past articles and sidebars are available for purchase through the Online Store. --Editor

PLAIN ENGLISH, PLEASE

Editor,
Here we go again! I approached the September 2001 article by John Ehlers, "Mesa Adaptive Moving Averages," with anticipation, hoping that some of his brilliant ideas would get through my bony head. But no -- for example: "Ratchetting refers to the short time constant upon command that allows the adaptive moving average to approach price value...." I expect that this is simple English to you and many of your subscribers; however, I have a faint suspicion that some of your readers would like some explanation.

Ehlers deserves commendation for his fifth paragraph, where he describes the Ema in plain English. I wish the rest of the article were as clear.

When I wrote dozens of articles for you, I tried to imagine I was explaining a matter to my Aunt Millie, who is intelligent but not acquainted with financial matters. This wasn't meant to put your readers in a class with Aunt Millie, but merely to force myself to use clear English. It isn't easy. Who was it who said, "If I had more time I would write you a shorter letter." Cheers.

--Art Merrill -Haverford, PA

Arthur Merrill has contributed more than 50 articles to STOCKS & COMMODITIES over the years. Many of those articles explained technical analysis concepts and indicators and tested the wisdom of commonly held beliefs about the market. He also was publisher of Technical Trends, the only digest that tracked statistically significant stock market indicators. He is the author of many books and reports, including Filtered Waves, Basic Theory and Behavior Of Prices On Wall Street. And, we can assure you, he is no bonehead!

Thank you for reminding us to put our engineer authors' writing into English; we're sorry you've had to remind us more than once.--Editor

MAMA MIA!

Editor,

I read with enthusiasm John Ehlers's September 2001 article, "Mesa Adaptive Moving Averages." I have a question about the TradeStation code listed in the sidebar on page 34.

I don't have TradeStation, but I understand EasyLanguage. As I was trying to convert the code to a spreadsheet, I came across two curiosities. First, "SmoothPeriod" appears in no other line of code besides its own definition. This suggests that it is either superfluous or something is missing elsewhere in the code.

Second, the line that follows the "SmoothPeriod" definition is also curious. The code reads:
If I1 <> 0 then Phase = (ArcTangent(Q1/I1))
Two of the parentheses seem superfluous. If nothing is missing, the code could be written:
If I1 <> 0 then Phase = ArcTangent(Q1/I1)
Putting these two together, it seems that in the above code something is indeed missing and since "SmoothPeriod" appears nowhere else besides its own definition, it seems likely the missing code has something to do with "SmoothPeriod."

Can you clear this up?

--Matt Crider, via e-mail

John Ehlers replies:

You have found footprints from my development of the MAMA indicator. I first used a smoothed version of the period, but later decided that it was better to remove lag and use the period rather than the smoothed period. Doing this, I neglected to remove the declaration of the SmoothPeriod variable. This is simply a declaration and does not affect operation of the code.

Moreover, the use of additional brackets does not affect code operation. I may have initially multiplied the ArcTangent by another term and neglected to remove the extra brackets in the process of changing my mind during development.

MARKET FACILITATION INDEX

Editor,
In answer to a letter to the editor in the September 2001 S&C, you gave a definition of Mfi (market facilitation index). Your definition of the single bar MFI is accurate, as defined in Bill Williams's book, Trading Chaos:
Mfi = Range / Volume
Williams also shows that the range and volume can be over multiple bars.
For daily bars, I have found that using a slightly different range appears to work somewhat better. If the range is defined as top - bottom, I use the maximum of today's high and yesterday's close (that is, the greater of the two) as top:
Top = MAX(H,C[1])
where:
H = Today's high
C[1] = Yesterday's close
and the minimum of today's low and yesterday's close (that is, the lesser of the two) as bottom:
Bottom = MIN(L,C[1])
where:
L=Today's low
The advantage of defining Mfi this way is that it takes into account opening gaps.

-- Don Kraska, via e-mail

Thanks for writing to share your tip.--Editor

BALANCE OF MARKET POWER

Editor,
First of all, I want to thank you for your great work. Each new issue is a treasure chest full of fresh ideas, which I await eagerly.

The August 2001 S&C contains a very interesting article about the balance of market power (BMP) by Igor Livshin. Although I did my own research on the relationship between open, high, low, and close, I never thought about it in the way the author did. The labeling of the parts as either bull or bear rewards was especially an eye-opener. So I did the math and this is what I found out.

In the following I am only considering the numerator of the expressions, because the denominator just turns the absolute point values into fractions of the full price movement (high-low):

RewardBasedOnOpen for both, bulls and bears:
= High ? Open -Open + Low

RewardBasedOnClose for both, bulls and bears:
= Close - Low ? High + Close

RewardBasedOnOpenClose for both, bulls and bears:
If Close>Open: = Close ? Open - 0
If Close<=Open: = 0 ? Open + Close

As can be easily seen, both expressions are equal:
= Close - Open

Calculating the numerator of the Bmp results in:
= High ? Open ? Open + Low + Close ? Low ? High + Close + Close -Open
= 3 * (Close ? Open)

Surprise! The high and low prices, which are marking the extreme levels reached by bulls or bears, simply drop out. What remains is the QStick published by Tushar Chande and Stanley Kroll in their book The New Technical Trader.

I think it would be better not to consolidate all the rewards into one Bmp, but instead to leave the bull and bear sides separated. Another idea would be to assign different weights to different rewards (for example, RewardOnClose*2), but I haven't done any testing on that yet.

Once again, keep up your great work!

--Ralph Malisch -Munich, Germany

JOSEPH STOWELL

Editor,

I am interested in Joseph Stowell's books and video; can you supply them? Do you know how I can contact him?

--David Lam, via e-mail -Hongkong

Sorry, we are not a reseller of products, so we can't provide them. Joseph Stowell himself is retired, but try his website at https://www.bondtrades.com, or check the Internet for other book resellers who may offer his books or videos.
--Editor

RUSSELL SANDS SYSTEM

Editor,

Could you please advise where I can purchase the Russell Sands Turtle Trading System mentioned in the August 2001 article, "Trading The Turtle System On Currencies"? It is apparently available from TradeWins, but how do I order the product? Do you have a contact telephone number?

--Ian Macleod, via e-mail

TradeWins can be reached at 800 710-8552. -Editor

TURTLE SYSTEM

Editor,
I have some comments on the Turtle system study presented in the August 2001 S&C ("Trading The Turtle System On Currencies"). I have been testing and trading systems for the last 20 years, including several versions of the Turtle system.

1. From Figure 4, one can easily calculate the annualized rate of return (Aar) (the product of Rrr x Mdd) to be on the order of 6.4%. This is a very low rate of return for a currency system. I would not touch any system with an Arr of less than 20%. The reasons are well known and include slippage, missed trades, bad executions, and so on. The 6.4% figure is essentially a negative return if one considers that during the in-sample period, interest rates were high. The same holds for the out-sample, with an Arr of about 7.2%. This is simply too low to trade.

2. A careful examination of Figure 4 shows that almost half of the equity growth is due to a spike around the 16th month. This simply implies non-uniformity and results that could be obtained by chance. The same is true for the out-sample, where a good chunk of the equity is due to a spike around the 25th month.

3. My testing of the Turtle system using EasyLanguage and TradeStation on daily data indicates a severe tradeoff between equity growth and drawdown. This is reasonable to expect, but the severity makes the Turtle system unusable. For low N entry, around 20 days, the system gives low drawdown, but also low returns. Increasing N entry to about 50, the Arr can go up to about 35%, but the drawdown gets up to 25-30%. Conclusion: The Turtle system does not escape the basic problems that hinder all known trend-following systems. To increase return, you must be able to sustain big drawdowns. It's as simple as that.

I can make available the EasyLanguage code for the Turtle system to any of your readers who are interested.

--Makis Charokopos, via e-mail Athens, Greece

Please e-mail us the EasyLanguage and we will post it at our website at https://technical.traders.com/sub/sublogin.asp for our subscribers to access.-Editor

SUBSCRIBER ACCESS TO TRADERS.COM

Editor,

I subscribe to STOCKS & COMMODITIES. Is there anything on the Traders.com website that I have access to as a result of the subscription?

--Travis Jones Atlanta, GA

Yes -- you will be able to access the subscriber-only area at https://technical.traders.com/sub/sublogin.asp, which is where we post code from articles and sidebars that you can copy and paste into your technical analysis software. Login to this area requires your subscriber account number and last name.--Editor

FUTURES CHARTING SERVICE

Editor,
I am a 20-year veteran futures trader in need of a weekly chart service. The one I have been using, CTS, has closed its doors. Could you possibly recommend some alternative chart service providers?

--Craig Carver, via e-mail

Check with Chartcraft (30 Church St., New Rochelle, NY 10801, 914 632-0422, usinfo@chartcraft.com, www.chartcraft.com). Chartcraft offers long-term historical charts and offers a weekly futures chart service.--Editor

BULL'S-EYE BROKER

Editor,
I was very happy to read your review of Bull's-Eye Broker (S&C, July 2001). I contacted the company and was told that a real-time version will likely be out in six months. I am looking forward to it.

--Kurt Gebbert, Germany

EDUCATION FOR BEGINNERS

Editor,
Just wanted to let you know that I think you have a wonderful educational area at your website for beginner traders. It would be nice if you offered it in PDF so that the charting information in the Novice Traders' Notebook section could be printed.

--Al, via e-mail

Thank you for your kind comments. You should be able to print the information from the HTML.--Editor

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