March 2005 Letters To The Editor
or return to March 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
NOVICE TRADERS
Editor,
I just started reading your articles, and although I don't understand even the simplest jargon (all industries have their buzzwords) let alone the mathematical models your writers are referencing during their testing process, I'm encouraged by your tutorial listed under "Novice traders" on your site. A very smart move -- anticipate a new subscriber.
David Frank
via emailThank you for your feedback. You might also want to think about looking into our online publication Working Money, which is targeted toward traders who are just starting out. - Editor
LAGGED MOVING AVERAGES
Editor,
In the October 2004 S&C, in the article "Trading Sector Funds Using Statistics" by John P. Twardy, in the sidebar, "Fitting a trendline by least squares," the sidebar's contributor, Arthur A. Merrill, mentioned a "lagged moving average," which is drawn through the "center" of prices. I am assuming that the lagged moving average is curved, which fits data in the similar manner as does a linear regression line, except it is a curve rather than a straight line. How do I calculate a lagged moving average?
Helmut Cook
via emailYou are correct in stating that a lagged moving average is a curve that fits the data to display. Essentially, a moving average smoothes the data, but moving averages do have a lag. The amount of lag is based on personal preferences, and typically when calculating a simple moving average, the lag is (n-1)/2.
-Editor
LINKING P&F AND BAR CHARTS
Editor,
I was pleasantly surprised by the article "Linking Point & Figure And Bar Charts" by Robert Busby in the January 2005 S&C. This was an idea I wished to add to my trading arsenal in the late 1990s. It finally culminated in my creating my own interactive website (for personal use only) in 2000 - a technique I still use to follow the currencies and some commodities. The site has point & figure charts (with definable bar and reversal sizes), bar charts, and a few other whistles and bells that the user can apply: trendlines, parallel lines, specialized pitchforks, and dynamic Gann lines (DGLs).
You can also draw bull and bear trendlines on the P&F charts. All lines are extendable at the user's discretion. That said, my reason for writing is not to advertise the website (as it is not a commercial activity), and moreover it is not complex enough to encompass the techniques discussed in the article, but it may be of interest to any of your readers who are interested in viewing the same data simultaneously on different charts. The data for each commodity can also be freely downloaded.
Anyone interested should point their browser to: www.forexwatch.net, where you can see EUR/USD data and charts under "Examples." Thanks to Robert Busby for writing the article.
Art Lowe
via email
INTRADAY OPTIONS DATA
Editor,
I would like to know reliable sources of intraday options data for the S&P 500 so that I can formulate and backtest option strategies.
Xavier Maria Raj
via emailThere are various sources for options data. I would recommend you visit our website, www.Traders.com, and look under Traders' Resources for vendors that supply options data.-Editor
KATSANOS AND THE PENNY STOCK SYSTEMS
Editor,
I was reading Markos Katsanos' very interesting article ("Las Vegas Or Los Nasdaq?") in the January 2005 S&C when I came across the mention of my article on stochastic pops. That caught me by surprise, given that I wrote the article more than four years ago!
I have a couple of possibilities as to why the stochastic pop didn't work well. One, it really works best with stocks in the $15-30 range, although in the interest of full disclosure I never backtested it with penny stocks. Two, in order to even use the stochastic pop indicator, the underlying index the stock trades on must be bullish. For example, Katsanos used ALAN in his article, so the Nadsaq Composite would be the underlying index. I define "bullish" as: 1) the index must be trading above the lower of either the 50- or 200-day moving average; and 2) the index must be heading higher, for example, today's close is greater than the close of 10 days ago. If both of these conditions are not met, the stochastic pop usually fails when it occurs.
I don't know over what time periods he backtested, but there were time periods when this setup condition was not met. For example, between early July through September 2004, the composite was below both moving averages, and even when it rose above it on September 10, it wasn't until the beginning of October that the 50-day moving average started heading higher. During those months, there could not be a stochastic pop, even if the other conditions set forth in my article were met. Looking forward to reading more of Katsanos' work in future articles.
Dave Steckler
via emailMarkos Katsanos replies:
I didn't mean to imply that the method described in your article did not work or was inferior to my method. I read a reprint of your excellent article in the 2004 STOCKS & COMMODITIES Bonus Issue as I was writing my article on penny stock breakouts, and it impressed me so much that I decided to include both the stochastic and the average directional movement index (ADX) in my research of breakouts. I suspect the reason that the stochastic pop did not work for me was that the setup I was looking at was different, as it was based on the date before the breakout.
In Steckler's example, SEBL broke out on October 4, 1999, and in the following three days it was up 26%. My method would have detected the breakout (assuming that the LR line was within my setup bounds) on October 4 when the stochastic was below 40. We would have to wait a day, however, for the stochastic to rise above 70, missing more than a third of the breakout. Because a large number of penny stock breakouts do not last more than two days, had I waited for the stochastic to rise above 70, I would have missed almost half the breakout profit.
Another possible reason for not getting a high stochastic value might be that I looked at oversold stocks breaking out from a long horizontal base only, excluding stocks in an uptrend.
You might be pleased to know that the stochastic pop works quite well in detecting breakouts from flags. I am currently doing some research on breakouts from flags and pennants for my next article and found out that 90% of the stocks breaking out from flags had a stochastic value of 55 or more before the breakout.
MORE ON KATSANOS
Editor,
I really enjoyed Markos Katsanos' January 2005 article in S&C. Several questions came to mind with the system he described. After working out the rules with 50 stocks, he tested it on 100 more. How did he pick those? Were they random, or were they ones that had done well, but he wanted to see if the system would work on them? What about slippage and liquidity? I wonder how that would have affected his outcome. In addition, what does the equity curve look like with this system if he tried to take all trades? In 1,729 trading days, 293 trades is one to two weeks on average, and an average of 70 bars per trade suggests 11 to 12 trades on average, but I'm sure there would be more if it takes more signals in bull markets. If all 100 stocks were traded, what about total cumulative drawdown? Can this be used on TradeStation as well? Does Katsanos have a place on Ragingbull.com where these issues are discussed?
S.L. Gotlib
via emailMarkos Katsanos replies:
Thank you for your interest in my article. Both stock lists include tradables trading in the major US exchanges, the NYSE, Nasdaq, or Amex from the beginning of 2003 until the summer of 2004. To compile my 50-stock research list, I first created an easy scan (with TC2000) eliminating stocks trading over $3 (at the time) and having an average volume of more than 30,000 shares per day for the last 30 days. I then browsed through the charts and included stocks with violent breakouts of more than 40%.
To test the system, I compiled a list of 100 stocks chosen at random but excluding any stocks from the first list. I then modified the list, replacing some stocks in order to include companies from different sectors (technology, biotechnology, natural resources, and so forth). Keep in mind that liquidity is not a major or permanent problem, as the most illiquid penny stock will become liquid when it breaks out.
It would be interesting to test a system trading all stocks at once. Unfortunately, this is not possible with MetaStock or similar off-the-shelf technical analysis programs. MetaStock's enhanced system tester will test all stocks separately and will present the total profit for all tests but no total drawdown.
You can paper-trade the system by performing an exploration or radar screen every day on a 100-stock list and holding all hits for 70 days.
Ragingbull is just a convenient email address. I spend all my free time researching for the articles and do not have time to manage a website. You can find all the information about the different trading systems in the articles I've written. Let me know if there is anything more that I can help you with.
MORE QUESTIONS ON KATSANOS
Editor,
Excellent article by Markos Katsanos in the January 2005 S&C. I have also been attempting to find an indicator-based system for penny stocks. I have a question: In his article, he did not mention anything about the proper setup. With so many thousands of penny stocks out there, I would prefer to write a formula to look for the proper setup. What are his thoughts? It was not very clear how he had found his picks. If it makes a difference, I use MetaStock 9.
Ali Seyrafizadeh
Ontario, CanadaMarkos Katsanos replies:
Thank you for your interest in my article. You can use exactly the same code that I presented for the penny stock breakout system to explore (scan) for breakout candidates. You only need to copy the code in a MetaStock exploration. To reduce the number of hits, you can first explore for low-priced stocks (C<3) with an average volume of 50,000 shares per day for the past 50 days (mov(V,50,S)>50000).
I usually explore for stocks trading only in the Nasdaq or NYSE and do not include OTCBB or pink sheet stocks. This will reduce the number of hits to three to six per day.
YET AGAIN MORE ON KATSANOS
Editor,
I read Markos Katsanos' article in the January 2005 S&C. He uses the following values to detect breakout:
Current Settings:
FVE_Threshold = -1
LinearREgThreshold1 = 0.31
2 = 0.4
3 = 0.2
MACDH_Threshold = -0.003
K_VolatilityThreshold = 20What are the values to detect the opposite breakout?
Don Reda
via emailMarkos Katsanos replies:
Thank you for your interest in my article. Unfortunately, I haven't tested this or a similar system for short sales or breakdowns, but I don't think that it would be the best short-sale system, as the probability of a breakout from a base is much greater than that for a breakdown. By the way, you forgot the SDC*ADX threshold.
Editor's note: Most brokerages will not let you short penny stocks.
KATSANOS QUERIES CONTINUE
Editor,
I just read Markos Katsanos' very interesting article (January 2005 S&C) about penny stocks. Could you refer me to a daytrading coach teaching out of the Los Angeles area?
Ezequiel Labreveux
via emailMarkos Katsanos replies:
Thank you for your interest in my article. The STOCKS & COMMODITIES website has a very comprehensive list of trading advisor services. Go to www.Traders.com and click on Traders' Resources. By the way, the trading system introduced in my article does not involve any daytrading.
KATSANOS AT LAST
Editor,
I was reading Markos Katsanos' article in S&C, and I had a few questions about his research. I am a private investor and I like to learn more about developing trading systems. Here are my questions:
Could I have the list of the 50 stocks in Katsanos' original research with the 30 different indicators that he initially used? I would like to see his Excel spreadsheet that contained the original information along with the values, direction, and divergence of the indicators.
What was the average gain and success ratio of his final trading system on the original 50 stocks? How did he determine what pattern or chart formation was present in those original 50 stocks? Was this just observation on his part, or did he use a software program? If so, what was the name of the program?
Katsanos indicated that more than half of the original 30 indicators were thrown out and that he statistically and empirically evaluated the others. Could he send me a spreadsheet with those statistics?
Robert
via emailMarkos Katsanos replies:
Thank you for your interest in my article. I've sent you the list. I don't know the gain ratio, as I tested the system on a different stock list. I used only MetaStock, Excel, and SPPS (for some of the statistical calculations).
I recognized the chart patterns by looking at each chart. The usual method for accepting or rejecting an indicator was percentile analysis - that is, the indicator should be good for more than 85% of the stocks in the list. Divergence was measured with the %B method discussed in my April 2003 S&C article.
ERRATA: ETFs
Editor,
Page 46 of the January 2005 issue talks about "electronically traded funds" ["A Five-Step Market Portfolio," by Andy Hicks], when I believe the author meant "exchange-traded funds."
Greg Morris
via email
IN MEMORIAM: THE FIRST CITIZEN OF TECHNICAL ANALYSIS
Arthur A. Merrill, one of the best-known practitioners of technical analysis, passed away on January 4, 2005, after a lifetime of practicing and teaching technical analysis to generations of technicians. He was 98. Merrill, who also served as a Contributing Writer for STOCKS & COMMODITIES for many years, was the author of classic works on the quantitative, primarily statistical, analysis of market behavior as well as dozens of articles for this magazine, and was the focus of an interview we conducted in our October 1992 issue. In 2002 we named him a Titan of Technical Analysis in recognition of his work in the industry. He will be missed.
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