May 2003 Letters To The Editor
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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
DAYTRADING QQQ
Editor,
I found the article "Daytrading QQQ" in the March 2003 STOCKS & COMMODITIES to be quite misleading.
In the latter part of the article, author Misha Sarkovich suggests taking advantage of the low probability of the QQQ falling outside a daily price range of +/- 2.5% from the open. For the +2.5% case, the probability is stated to be approximately 30%, which I confirmed with my own testing. However, the basis for the daily high technique is described in the false statement: "If the prices increase 2.5% from the open, there is a 70% probability this is the high for the day, and there is only a 30% probability that prices will continue to increase to higher levels." After the price has moved up 2.5% from the open, the original probability is no longer applicable. The new sample group is now the subset of days where the intraday price has reached a price increase of 2.5% from the open. Of these days, the probability of closing above the 2.5% level is approximately 50%. So there would be no advantage to taking a long or short position at that point. My test results are included below:
Symbol: AMEX:QQQ (QCharts data, Wealth-Lab Developer) Test period: 2000/01/02 to 2002/07/01 (2.5 years as per article) Total days = 625 Total (open) +2.5% = 191 (30.56%) Total of these closing above +2.5% = 96 (50.26%) Avg. price move from +2.5% to close = $-0.03Steve Dunn, Vancouver, Canada
See also the next letter.-Editor
DAYTRADING QQQ
Editor,
In "Daytrading QQQ" in the March 2003 S&C, in discussing Figure 4 on page 31, author Misha Sarkovich concludes that there is a probability of approximately 60% that QQQ daily prices will not decline below the 2.5% price change from the open. From looking at the figure, I would agree. However, the conclusion that "if prices decline 2.5% from the open, there is a 60% probability that this is the low for the day and only a 40% probability that prices will continue to decrease to lower levels" cannot be concluded from Figure 4. Once prices have declined to 2.5% from the open, I would suggest that this subset of the population has to be examined separately.
An analogous situation would be to say that if mortality tables estimate an average lifetime of 80 years, a person who reaches 75 can expect to live only five years more. This would not be true. A person who already has reached 75 can expect to live significantly longer than the average lifetime of 80 years.
William Gryc Hartland, MI wgryc@tir.comMisha Sarkovich responds:
Thank you for your interest in my work. My analysis of the intraday high and low price levels was a static analysis from the starting point of the market open. It was designed only to be a warning sign to daytraders that prices seldom continue going up or down from the open to close in a linear fashion. When QQQ prices go up 2.5% from the open, the probability is strong that QQQs are reaching overbought levels and it will not be a good idea to open a new long position and chase that rally. Conversely, if QQQ prices go down 2.5% from the open, the probability is such that QQQ are reaching oversold levels and, in my opinion, this will not be a good time to open a new short position and chase that pullback.
I also agree that if the QQQ prices go up or down 2.5% from the open, then we could easily establish a new subset of price population (that is, prices that already went up or down from open more than 2.5%) and examine that subset of data separately. It is true that if mortality tables estimate an average lifetime of 80 years, then a person who reaches 75 is not sentenced to live only five additional years. Obviously, this would not be true. If we select a subset of all individuals who are now 75 years or older, then the new average lifetime for this subset will be much higher than 80 years - for instance, 90 years. But then we can establish another or third sub-subset of all individuals who are now 90 years or older, and then the new sub-subset average lifetime will be, for instance, 95 years. When do we stop creating the additional subset of population data?
AUTOMATIC TRADE EXECUTION
Editor,
I would like to have my systems autotraded, and I know a number of brokerage firms offer this service.
However, I have a problem. I do all my systems analysis on the stock market, but then use options as my trading vehicle (for the leverage). The decision of which option to purchase is completely mechanical: for going long I buy at-the-money calls, for going short I buy at-the-money puts. When an exit signal is generated on the underlying stock, I simply sell the option at the market. The expiry date is also mechanically determined.
My problem is that the brokerage firms I know of that offer the service of executing your trading system for you (whether the system is commercially available or independently developed by the trader) only deal with stocks and futures. Therefore, I have two questions:
1) Could you provide a list of firms that offer the service of autotrading systems for clients?
2) Do you know of any trading firms that offer the service of autotrading my method (completely mechanical), which involves analysis of stock price movements, but then uses the options as the trading vehicle?
Tim Suffern, via e-mailTry checking the Traders' Resource listing at our website, Traders.com, and search for the features you need.-Editor
DeMARK METHODS
Editor,
I've become fairly interested in Tom DeMark's technical research and indicators, and I'm disappointed to see that very little has been done by STOCKS & COMMODITIES in exploring his work for your readers.
DeMark's Sequential and Combo techniques aside, I was hoping that one of your staff writers could do an article on DeMark's Moving Average I, which is covered on pages 244-46 in his book New Market Timing Techniques.
The moving average is such a ubiquitous trading tool that I'd think that a tremendous number of your subscribers would find value in such an article. In addition, DeMark's effort to create a moving average that distinguishes between ranges and trends would provide a different slant in comparison to recent articles I've seen in your magazine, which primarily address techniques for reducing lag in moving average-like indicators.
In addition, any MetaStock code provided for DeMark's moving average indicator would be much appreciated.
Ondrea H. Delio, via e-mailWe interviewed DeMark in the May 1995 issue of S&C ("Exploring the Science Of Technical Analysis With Thomas R. DeMark"). See also DeMark's August 1997 S&C article, "The TD Range Expansion Index (TD REI)," in which DeMark explains how to use his TD REI and the TD Price Oscillator Qualifier indicators. Back-issue articles are available from the Online Store at our website, Traders.com.
Unfortunately, since implementing DeMark's indicators requires making certain assumptions, it is difficult for others to reinterpret the techniques and write about them with any accuracy. If you like DeMark's New Market book, we suggest you check out his others. If you are interested in moving averages, visit our article archive for hundreds of articles on various types and uses of moving averages, some quite ground-breaking.
For MetaStock code, please contact Equis International or visit MetaStock.com. We don't specialize in writing code for particular software.-Editor
SIGMA BANDS
Editor,
Recently I saw a chart with sigma bands on it. Can you assist me in finding out how these bands are calculated and how they are interpreted?
Richard Selby, via e-mailLet's find out. Readers? -Editor
Z-SCORE AND ZIGZAG
Editor,
The code for the z-score and zigzag indicators were given for a number of programs but mine was missing. Have these been developed for OmniTrader or TC2000?
Richard Semock, via e-mailThe February 2003 S&C contained "Zigzag Targets" by William Cringan and also "Z-Score Indicator" by Veronique Valcu. Both articles were the focus of the Traders' Tips section in that issue, in which various developers of technical analysis software contribute code to help readers implement some of the techniques discussed in that issue.
As for TC2000 and OmniTrader, not all software developers contribute to our Traders' Tips section, because not all software has the programmability necessary to input code or custom indicators.-Editor
PRODUCT REVIEW VS. INFOMERCIAL
Editor,
Willy Verwoerd (Letters to S&C, March 2003) quite correctly complained that "Trading The E-Mini" by Dennis Meyers in the January 2003 S&C was not a usable article for the average reader; no code was provided for the common systems available to most users. Verwoerd called the article a "product review," as the author would only sell the system.
You brushed aside this criticism, saying the article wasn't a product review. Perhaps not; perhaps it is more correctly described as an "infomercial." When no code is provided for an article detailing a trading technique, it is not helpful to the reader. When the author then offers to sell the system to the reader, the article is de facto an infomercial.
Many of the articles you publish are written by those who make a business of writing commercially available trading systems. This is obvious from the brief biographical note that accompanies the article. There is nothing wrong with this. But a problem arises when the rare article appears without code for various systems, and serves as a "teaser" for an offer to sell. That doesn't seem right.
Dick Sternbach, via e-mail rstrn@san.rr.comAs we said in our answer to Verwoerd's letter in the March 2003 Letters column, Meyers has contributed many articles to past issues of S&C, some of which provided background information on the topics discussed in his January 2003 article.
We cannot provide code for every different program for every article. It is impossible for the author to provide this and impossible for us to provide this. That doesn't mean an article is without worth.
Many contributors to our magazine develop systems and software either for personal or commercial use. This is what gives them the expertise to write articles on system development.-Editor
TRADERS' RESOURCE: TRADING SYSTEMS
Editor,
In the January 2003 S&C, in the Traders' Resource section beginning on page 104, there seems to be an error in the "Top Ten Viewed" list. According to that box, the no. 1 system is "The Trading System." However, I can neither find it nor the company, TheTradingSystem.net, on the Internet. Neither does the e-mail address or phone number work. Could you please clarify?
Robert Amory, via e-mailThank you for pointing this out. Sometimes companies go out of business and their listing is not removed right away.
Something to point out, however, is that our Top 10 Viewed list is not a ranking. We do not rank or rate trading systems or software. As the caption below the Top 10 box states, that listing is the 10 products most clicked on by website visitors to our Traders' Resource. We believe this helps tell readers what other readers are interested in and asking about, but that's all it does. The Traders' Resource feature itself is a listing of the various products available on the market, and provides a starting place for traders to research products and services.
If you are researching trading systems, a good resource to check is Futures Truth at www.FuturesTruth.com. The sole editorial mission of that publication is to track and rank trading systems. It is beyond the scope of our own magazine to track and rank trading systems, which requires tracking the systems over complete market cycles and is a time-consuming endeavor.
Another resource to check is the National Futures Association's website at https://www.nfa.futures.org, which offers background information on companies and services related to the futures industry called the Background Affiliation Status Information Center (Basic).-Editor
TRADERS' RESOURCE: EXCHANGES
Editor,
I was reading the February 2003 issue. The Traders' Resource section on pages 110-13 failed to mention the Toronto Stock Exchange (TSX):Private Client Division
BMO Nesbitt Burns Inc.
Phone: 306 343-3634
Fax: 306 653-7227Rod M. McLellan, via e-mail
Thank you for providing this information for other readers.-Editor
TAX TIME
Editor,
I thought I read in your magazine that as a trader, I need to register with the IRS. I've been searching your magazine and cannot find it. If you know the correct tax form, please let me know what it is.
By the way, your S&C is a great magazine. I have recommended it to other traders.
Cliff Budd, via e-mailYou may be remembering Ted Tesser's article in the January 2000 issue of S&C, "It's What You Keep That Counts." The form that's mentioned for trader status is Schedule C.-Editor
POINT & FIGURE CHARTING
Editor,
Point & figure is a very old method. Mainly, it was used before the computer age. Nevertheless, it is still a very efficient way to smooth curves.
I personally have developed (in the MetaStock syntax) a system converting linear regression and prices in order to reduce whipsaws and maintain an acceptable time response.
My wish is to find information and articles about mixing P&F theory (using no time scale) with classic MetaStock formulas (with a time scale). Any other articles concerning P&F would be welcome as well in your interesting magazine.
William Godrie, via e-mail
BelgiumYou can search for articles on particular subjects using the search feature at our website, Traders.com. Try also the MetaStock website and e-mail discussion forum.
Here are some articles we've published on point & figure charting. However, none of them offer MetaStock code. The article listed below by Joe Demkovich uses MetaStock to plot charts.
Point & Figure Charting (January 2002)
With all its Xs and Os, three-point reversals, and subtle-but-effective chart patterns, point & figure charting is still all about supply and demand. By David PennHigh-Probability Point And Figure (April 2001)
If you want buy and sell signals from a charting system, point & figure charting may be for you. By Joe DemkovichClassic Point & Figure (December 2000)
It was around before computers; it was around before calculators. It's been around forever, and despite that, it still works. It's point & figure charting, and it still offers unique advantages. Here are some examples. By David VomundOn Building Point & Figure Charts (March 1997)
Point & figure charting is one of the classic techniques of technical analysis. Here's a refresher look at the basics. By Daryl GuppyLogarithmic Point & Figure Charting (July 1995)
Traditional point & figure charting is one of the oldest methods known in technical analysis. The technique is unique because it only records the direction and change in price while ignoring time. But it has certain disadvantages; for example, it is virtually impossible to adjust a point & figure plot for stock splits or dividends without replotting the whole chart. Making each box represent a fixed percentage change - a logarithmic scale - has several advantages. Here's what they are. By William G.S. BrownSuccessfully Trading Currency Options (Jaunuary 1990)
With the proper use of point & figure charts it is possible to derive certain probabilities of success for different formations. The astute option trader can change the risk-reward characteristics of options trading by selecting an underlying instrument - in this case, a currency - with a chart pattern that has a high probability of success. By Thomas DorseyLogarithmic Point & Figure (October 1991)
Could filtering point & figure upgrade it to logarithmic status? By Arthur A. Merrill, C.M.T.Point & Figure Charting (January 1993)
Point & figure charting, a technique for following stocks and commodities, may be simplistic but still offers the keys to success: trend identification, price objectives, and money management, all of which it provides. By Gary Van PowellPoint & Figure Relative Strength (February 1993)
Use point & figure and relative strength to identify strong and weak stocks. By Michael J. Moody and Harold B. Parker
CODING INDICATORS
Editor,
I have been on a trial subscription. Your articles contain a plethora of information. They are superb. But to improve one's knowledge, it is necessary to have some basic information first.
Is there a way I can learn to create indicators? In a Traders.com Advantage article on MACD by Dr. Michael J. Seiler dated 02/14/01, he gives instructions to create an MACD indicator. Currently, I am a beginner and am not well versed in the terminology. I would like to have some guidance on how to create this indicator.
Sheikh Muhammad Deen,
via e-mailThere are several articles in our online magazine, Working Money, that you should find interesting and informative. In addition, you can search for past articles on our website for articles on indicators. Typically, you want articles under the Novice Trader or Basic Techniques theme blocks. -Editor
VALUE AREA
Editor,
I am wondering how you determine what the value area for the next day is. The only information I have found on it says it is determined from where 70% of the volume from the day before was. If there is an explanation on the website or you know of somewhere with a good explanation of how I can determine this, I would greatly appreciate it.
Matt Thomson, via e-mailWe've published several articles about Market Profile that should contain the information you're looking for. Thanks for your interest, and good luck. - Editor
ERRATA: INTERMARKET REVIEW
Editor,
A chart is in error in Intermarket Review, top of page 30 of the January 2003 S&C. The three-year chart shows a 200-period moving average on the right-hand side that is higher than any spot price. This appears to be an error in the software that printed the chart. A similar error appears on the lower chart on page 32 (October 2000 and October 2002).
A similar error appears the next month in S&C, February 2003, Intermarket Review, page 120 bottom (October 2002) and top of page 121 (October 2000 and October 2003).
Happily, the next issue of S&C is free of any similar obvious October-related error.
John Pfuetze
Centennial, COThanks for keeping an eye out for us! -Editor
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