January 2005 Letters To The Editor
or return to January 2005 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
TRADING SECTOR FUNDS USING STATISTICS
Editor,
The October 2004 article by John Twardy, "Trading Sector Funds Using Statistics," piqued my interest, and the sidebar on determining a trendline by least squares was very helpful. I do have a request for a couple of clarifications.The gain/risk index is to be computed for each sector fund for the last 30 days. The next step is to "rank the funds according to this index." Please explain how the ranking relates to 30 days of gain/risk index computations. Is a 30-day average to be used? Also, there is reference to the value of the "sum of the gain/risk index values for all funds for any given day makes up the sector trend index. This gives you the overall trend of the market, which is helpful for this short-term analysis." How is this value specifically used when selecting the highest-ranking fund?
Pete Bock
via emailJohn Twardy replies:
Only the last 15 days of data is used. The article should have stated to "do this for each of the past 15 days," not 30 days, although this really doesn't affect the results, as only the most current 15 days of data is used.The sector trend index is not used for selecting the highest-ranked fund -- it just gives you a "feel" for the market trend.
MORE ON TRADING SECTOR FUNDS
Editor,
After struggling for the past few days unsuccessfully to replicate the gain/risk index shown on page 84 of John Twardy's October 2004 article, "Trading Sector Funds Using Statistics," for FIDSX (6.2) and FBMPX (18.7), I wondered how would be the best way to ask questions that might help me to successfully replicate Twardy's work. I thought the most direct way would be to send you my spreadsheet [not shown--Editor], which I produced based on my interpretation of the instructions you gave on page 83.The attached spreadsheet has two tabs, one labeled FBMPX and the other labeled FIDSX. I have reduced the dataset to only that data which should be necessary to produce a gain/risk index result for August 26, 2002.
Any help you can provide would be greatly appreciated.
Axel Gumeson
via emailJohn Twardy replies:
The discrepancy appears to be because you have used adjusted Nav data instead of closing data -- that, and it appears that some of your historical data has been corrected, which resulted in slight differences in our calculations. Taking all this into account, your spreadsheet now duplicates the results I get with the adjusted data.
METASTOCK CODE FOR TRADING SECTOR FUNDS
Editor,
I have been a long-time subscriber to Stocks & Commodities. I especially enjoy the articles that discuss trading methods.In the October 2004 article "Trading Sector Funds Using Statistics," I had a couple of questions for the author, John Twardy. First, I wanted to better understand the logic behind the gain/risk ratio.
The way I understand it, the highest-performing 15-day sector with the lowest standard deviation to a 15-day linear regression line is the one to select. A high return with low risk -- that sounds very good. But why 15 days? And could it be done on weekly data? What kind of testing was done to end up with 15 days?
Second, I attempted to create a MetaStock formula, but I was not able to fully understand the basis for the formula in the article. Here is what I tried:
ROC(c,15.%)/(Sqrt(Var(Linearreg(c,15),15)))
Unfortunately, I was not able to get the same results as in the article. I know that you sometimes get the software vendors to submit code. Any help would be appreciated.
D.J. Vatalero
via emailJohn Twardy replies:
I looked at various time periods -- 30 days and 15 days -- to find a system that would trade often enough to keep up with market trends but not so frequently as to create seesaw trading. In my testing, the 15-day average outperformed the 30-day average. Taking the 30-day minimum holding period (for the Fidelity fund) and looking at the performance over half the holding period helps to show the trend that is hidden in the longer-term average.
Regarding MetaStock code, sorry, that's not something I can help with.Editor's note: You may post your question to MetaStock User Groups (www.equis.com/Education/UserGroups).
VECTORVEST
Editor,
I'm a new subscriber to your magazine. I have a question. Have you ever reviewed VectorVest, and if so, what opinion did you have on it?Karl Osygus
Surrey BC, CanadaWe have reviewed the product VectorVest four times over the years. The most recent review was written by Leslie N. Masonson in our June 2003 issue [Volume 21:6 (70?76)]. Past articles and reviews can be purchased through our Online Store at our website, www.Traders.com.--Editor
TRADESTATION 8 REVIEW
Editor,
In your product review of TradeStation 8.0 in August 2004 issue, you mention that one of the features is the ability to backtest and automate single-leg option strategies. In the TradeStation advertisement in the same issue, the same statement is made. I am a user of TradeStation 8.0 and I am unable to backtest any option strategy. I did contact a few EasyLanguage consultants as well as TradeStation support, and I got the same reply -- that there is no provision to backtest option strategies.Is this feature of backtesting single-leg option strategies really available in TradeStation 8.0? If so, can you guide us in this matter? On the other hand, if this feature is not available, then how is that you have stated it is a feature of Tradestation 8.0?
Xavier Maria Raj
IndiaTradeStation replies:
You can apply a strategy to an option symbol and backtest and automate it as with any other symbol. The only limitation is that it doesn't allow automated trades without confirmation (this is a requirement by the option exchanges).
PERCENTAGE COMMISSIONS
Editor,
I read with interest Bennett McDowell's article about money management in your August 2004 issue ("Fine-Tuning Your Money Management System"), and I have been trying to implement this into my trading system.I decided that I would use a risk of £500 per trade, but I have noticed on my paper trades that the actual loss with commission on a number of trades has been more than £700. I realize that in McDowell's article, he says that commissions should be taken into account when making the calculations, but I pay a percentage commission of 0.15% per trade. This has meant that instead of having a fixed percentage loss, it becomes varied. This varied number doesn't work in the money management system explained in the article.
I have also not been able to find a brokerage that allows a margin of 10% with a fixed-fee commission. Are there any other systems that would work better for percentage commissions, or is this the best one?
Paul Allen
via emailBennett McDowell replies:
Variables such as percentage commissions when calculating trade size require additional calculations. The following procedure will help you calculate your trade size correctly enough to satisfy your risk objectives. Here is a suggested method for taking into consideration percentage per-trade commissions:1 Calculate your trade size based on the calculations in the article. Do not include any commission amounts.
2 Apply the following calculations:
a) Calculated trade size * entry price = Total dollars of the trade
b) Commissions percentage * total dollars = Commissiondollars
c) Commission dollars/Entry price = Shares/contracts to subtract from your gross trade size = New trade size adjusted for commissionsNow, realize that your new trade size adjusted for commissions will actually have a slightly lower commission because you have lowered your total dollars by subtracting a few shares/contracts. But the error will be on the side of being conservative versus reckless.
SAME OR DIFFERENT?
Editor,
I'm a Brazilian student who studies business administration at the University of São Paulo. I read some articles about your magazine, Stocks & Commodities, because I'm doing a work paper about technical analysis and fundamental analysis. In this paper, I studied about both types of analysis and now I'm doing an analysis about their differences or similarity. So, I would like some help, some magazine article about this theme. Can you help me? Can you send me any clue where I can find help? Thanks so much and congratulations for the magazine.Daniel Chaves
via emailI would recommend you go to our website, www.Traders.com, and do a search for "fundamental analysis." One article that we have published is "Combining Technical And Fundamental Analysis" by Mark Snead. That would probably be a good starting point for you, but there are several others. You can purchase individual articles through our Online Store.--Editor
RELIABLE?
Editor,
I live in Mexico City and I am a subscriber. I am very happy with your magazine and with your website information. It has been very helpful in my trades. I have a doubt and I think maybe you could help me. I have an account with Forex Global Investment Llc (www.forexgi.com), and I trade futures, commodities, stocks, and FX. The platform I use is MetaTrader (metaquotes.net), and I am satisfied with them, but I was reading the September issue and didn't find them in the brokerage section. So could you help me to know if this company is reliable and if I can trust in them?Gerardo Fernandez Diego
via emailThe fact that MetaTrader is not listed in our Traders' Resource is no reflection of their reliability. It merely means that their information has not been entered into our database. --Editor
CLARIFICATION: FIBONACCI AND GANN PROJECTIONS
Editor,
In the October 2004 issue you included an article by Dennis Peterson, "Fibonacci And Gann Projections," regarding time projections based on my 1992 article in your magazine, "A Spreadsheet For Time Ratio Analysis." Peterson didn't contact me prior to writing the article. If he had, I would have been glad to provide him with updated information regarding the proper ratios and swing filters to use to make more accurate time projections than those described in my original article. In the past 11 years, the procedure has been improved greatly.The greatest improvement is having identified the specific ratios for time projections applicable to common Elliott wave patterns and trading ranges.
Peterson refers to Figure 2: "Cycles vs. ratios" in the article as my time ratios for particular combinations of pivots or swings. While I do not have a copy of the article, I'm sure you would not find that I suggested 1.732 or 0.707 as significant time ratios for C (cycle) or 1st Alt projections.
I also found it interesting that the Traders' Tips section of that issue described how to program time projections in many popular software programs but failed to include the one charting software I specifically designed for time and price projections, Dynamic Trader, which I first released in 1997 and is currently in the fourth version.
I am glad your writer found my 1992 article interesting enough to attempt to apply. I also appreciate the acknowledgment in the article. Few current educators acknowledge who originally contributed to their trading process. But as Peterson describes the time projection process in the article, it is far from what I originally described and quite outdated, considering the past 11 years of research, updating, and practical application.
Robert Miner
via email
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