Letters - September 2004

September 2004 Letters To The Editor
or return to September 2004 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

MAXIMUM ENTROPY METHOD
Editor,
I am a 34-year-old Italian engineer. I am interested in the maximum entropy method as applied to the financial markets. I would implement this method in an Excel spreadsheet. Could you kindly suggest a list of articles I could buy from you in order to do that?
Giuseppe Bassetto, via email
Publisher Jack K. Hutson replies:
Over the years, we have published many articles on maximum entropy spectrum analysis (MESA ). In Volume 2 (1984) of Technical Analysis of STOCKS & COMMODITIES, The Traders' Magazine, Anthony W. Warren and I published a series of articles that included Basic code to implement the maximum entropy method (MEM) for short-term market forecasting. The code is written in Applesoft Basic for an Apple II computer, but could be adapted to run under Microsoft Excel using Excel's Visual Basic for Applications. MESA is too complex to implement directly in a spreadsheet.
We've also published many articles by John F. Ehlers on MESA and other engineering techniques. Ehlers has developed a commercial program that he sells under the name Mesa (see www.mesasoftware.com). We also interviewed Ehlers earlier this year in the January 2004 S&C; an article description follows.
You can search for these topics or authors using the search box at our website, Traders.com. The search results can take you to individual articles for sale through our Online Store. Alternatively, you can get all our articles at once by purchasing our S&C on CD, or you can purchase a single volume in book form (select years only).
Editor: We'll also list the most relevant articles here. However, none of them offer Excel implementation.
January/February 1984
An Introduction To Maximum Entropy Method (MEM) Technical Analysis
This article is of great interest to readers using (or planning to use) a computer for forecasting. MEM is the first article in a series on cyclic prediction. In it, Warren presents a method of adaptive filtering and data forecasting. The article also contains a handy glossary of cyclic terms. By Anthony W. Warren, Ph.D.
March/April 1984
Optimizing The Maximum Entropy Method
Warren continues his series of research articles on the mathematical forecasting process called the maximum entropy method (MEM). This article looks at optimizing procedures in obtaining the most significant input, while filtering extraneous noise. By Anthony W. Warren, Ph.D.
July/August 1984
Maximum Entropy Optimization
A look at a promising system for short-term spectrum analysis and trend forecasting. This article discusses the process of obtaining an optimal set of MEM coefficients using the author's computer code as adapted to the CompuTrac system. By Anthony W. Warren, Ph.D., and Jack K. Hutson
December 1984
Forecasting With Maximum Entropy
A detailed description of forecasting with maximum entropy, including a BASIC computer routine. (See the February 1985 issue for additional program information.) By Anthony W. Warren, Ph.D., and Jack K. Hutson
September 1986
A Comparison Of The Fourier And Maximum Entropy Methods
By describing prices mathematically, the trader can extend the equation into the future to predict what the prices will be. Cycle analysis makes this easier to accomplish. Here, Ehlers examines two of the more well-known methods, Fourier analysis and maximum entropy, and compares their relative usefulness in predicting future prices. By John F. Ehlers
November 1987
How To Use Maximum Entropy
Maximum entropy spectrum analysis (MESA) is a forecasting method that filters the "noise" from time series data and can uncover useful cycles. The author discusses the advantages of the maximum entropy method over Fourier analysis, especially for short-term trading. By John F. Ehlers
September 2001
MESA Adaptive Moving Averages
What if you combined the power of maximum entropy spectral analysis with the Hilbert transform's ability to discern phase change? By John F. Ehlers
January 2004
John Ehlers Of MESA (interview)
John Ehlers pioneered the use of the maximum entropy spectral analysis algorithm for measuring market cycles. What's he doing nowadays? By Jayanthi Gopalakrishnan

TRADERS' TIPS
Editor,
In the Traders' Tips section of your magazine, every month it is stated that the eSignal code can be found in its entirety on your website. However, I have never been able to find it. The instructions (given in italics) at the beginning of the section lead nowhere. No amount of navigation or searching leads to the Traders' Tips section. Does it really exist?
Wojtek Ciszak, via email
Yes, it does! You will always find the current issue's Traders' Tips section at:
https://www.traders.com/Documentation/FEEDbk_docs/TradersTips/TradersTips.html
You will find past-issue Traders' Tips at:
https://www.traders.com/Documentation/FEEDbk_docs/backissues.html
You can also use the search engine at our site to locate Traders' Tips. To do so, scroll down our homepage (https://www.traders.com) until you see the search box underneath the "Help" graphic, or click on the "Search" in the red box at left. Then type in "Traders Tips," then select "Search S&C magazine" from the pulldown list of searchable areas. Then click Go.
Alternatively, to navigate to the Traders' Tips page, go to our homepage at https://www.traders.com, then click on "Stocks & Commodities" in the red table of contents box at left. This will take you to the STOCKS & COMMODITIES homepage. Then click on "Current Issue" in the red box at left, near the top. This will bring up a reproduction of our current issue's table of contents from the magazine. Scroll down until you see "Departments" at right. Click on "Traders' Tips." This will be the current issue's Traders' Tips section.
We only truncate eSignal code in the magazine when it is very long, which has happened a few times. The rest of the time, the entire code listing is shown in the magazine, as well as given at our website. In addition, the code published in Traders' Tips is often available at the software developer's website.-Editor

METATRADER
Editor,
As a reader of STOCKS & COMMODITIES, let me first congratulate you on such a fine publication. Your articles have been very informative and have helped me improve my trading skills over the years.
I am glad to see many of the indicators developed into the various trading platforms in the back of your publication [the Traders' Tips section], and I have adapted a few of them for my own use. As an active trader of forex and a user of MetaTrader, I would love to see these indicators adapted for the MetaTrader platform. I am involved in several MetaTrader user groups and can assure you there are thousands of users out there who could benefit from such a resource.
I hope you will consider my request.
Bill Godfrey, via email
Thank you for your suggestion. We have contacted MetaQuotes Software Corp., developer of MetaTrader (based in Cyprus), and they will consider contributing to our Traders' Tips column.-Editor

MORE ON METATRADER AND FOREX
Editor,
I've been looking for some inexpensive (or free) software that will allow me to backtest trading strategies for the forex markets. I found something called MetaTrader and have signed up for a demo account with a forex broker that uses the software. It seems like a pretty good piece of software (so far), but I haven't heard about it until now and I can't find any reviews for it. Have you done a review of it? If not, would you?
Kris Carlson
kris_carlson@charter.net
See also the previous letter and response concerning MetaTrader. We hadn't heard of MetaTrader until now, since the company that developed it -- MetaQuotes Software Corp. -- is based in Cyprus, but perhaps we can review the software in a future issue. In addition, we hope to publish some Traders' Tips submitted by MetaQuotes Software.-Editor

SOFTWARE FEATURES
Editor,
I am interested in knowing whether there are any charting software packages that allow you to save the trendlines you've drawn (and extend them as time goes on), even when flipping between stocks (since I would hate to keep redrawing the same lines over and over each time I reviewed my stocks).
In addition, are there any programs that alert the user to a trendline breach or nearing (within 2%) of a trendline, as opposed to alerts based on absolute price levels?
M. Salzbank, via email
You can try using our Traders' Resource database at https://technical.traders.com/Products/home.asp to search for particular software features. Simply go to the Software category, then use the search field to name particular features.-Editor

NEW TO TRADING
Editor,
I am new to the field of stock trading, so please provide me with some guidance on all the terminology and techniques that could improve my knowledge of the business sector.
Altaf Hussain Unnar
Karachi (Pakistan)
Start by reviewing your brokerage's literature on how to place trades, and find out what resources your broker offers online. For terminology, you can peruse our Traders' Glossary at our website, Traders.com. Then pick up some introductory books on trading, subscribe to some financial newspapers, and keep reading STOCKS & COMMODITIES for all the best techniques for trading!-Editor

BUY AND HOLD
Editor:
In the July 2004 S&C, Matt Blackman did some interesting research on a simple moving crossover system ("Do P/E Ratios Really Matter?"), and compared that to a buy-and-hold approach based on the Dow Jones Industrial Average for an 84-year period. His study showed that if the trader used the crossover system, the yield was 9.33%, versus a buy-and-hold yield of 5.47%. This implied a 70% improvement over buy and hold.
Since the 9.33% return was only for 49.8 years (the years actually in the market), and the other 34.2 years had a zero return (funds were kept in cash), it turns out that for the entire 84-year period, the returns of the two systems were identical -- 5.5% versus 5.5%. This is because the buy-and-hold investor was getting 5.47% annually for the 34.2 years that the crossover trader was out of the market and getting zero return. Now, if the crossover trader invested in Treasuries or a savings account, his return could increase, but then you may have to worry about fluctuations in interest rates or other transaction costs.
Jeffery M. Cohen
jecohen@umd.edu
You are correct. The money held in Treasuries or a savings account would have earned a positive return if interest rates were reasonable and transaction costs were negligible. -Editor

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