May 2006 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

Z-TEST

Editor,

I would like to comment on Jacinta Chan's March 2006 article on the z-test ("Trading Trends With The Bollinger Bands Z-Test"). I use the zigzag function for the basis of my intermediate trend-following model. As others have also commented in the pages of STOCKS & COMMODITIES, no matter how you structure your trend and trigger points, there is always a remaining question of the validity of the new trend. In other words, is the active tail real?

Many people have proposed various ways to validate this tail. However, the z-test is the most straightforward, and it seems to work just as well as the others, or maybe better. The MetaStock code I use for this follows:
  

.5;0;-.5;

N:=Input("TREND LENGTH",0,10000,100);

Z:=((C-Mov(C,N,S))/Stdev(C-Mov(C,N,S),N));

{Z;}

{INVERSE FISHER TRANSFORM}

IF1:=(Exp(2*Z/100)-1)/(Exp(2*Z/100)+1);

IF2:=IF1/LastValue(HHV(Abs(IF1),N));

{IF2;}

TS:=TSF(IF2,.05*N);

TS;


I run the z-test through the inverse Fisher transform à la John Ehlers ("The Inverse Fisher Transform," May 2004 S&C). IF2 is simply a factor to boost the IFT to the limits of plus or minus 1. I run a 5% time series on it just to smooth the data.

I use the z-test to confirm or deny my trigger line -- that is, avoid whipsaws as much as possible.

I would certainly welcome any comments or better formulations that anyone has found.

Ken Kesler
Missouri City, TX

Thank you for writing. Perhaps other readers will comment.

Subscribers who want to try out this code can find it at our website for copying and pasting in both the Letters to S&C section at www.Traders.com and also at our Subscriber Area (click on "Article Code" from our homepage at www.Traders.com). Login requires your subscriber number and last name.--Editor

USING ZIGZAG TO DETECT BREAKOUTS, REVISITED

Editor,

I only just recently saw Markos Katsanos' reply to my previous letter to the editor, both published in the November 2005 issue (I received this issue with great delay because it got lost in the mail and your subscription department was kind enough to send me a replacement copy). This discussion stems from the article "Detecting Breakouts From Flags & Pennants" by Markos Katsanos, published in the May 2005 S&C.

I thought it would be a good idea to come back with a few comments, albeit belatedly. Here is my reply:

1. Katsanos says that he does not use zig for detecting flags but only for calculating the days since the formation of the flag pole. My answer is that the use of zig without confirmation is wrong, no matter what one is trying to calculate. In this case, for example, since zig is not confirmed, the recent peak -- used as the flag pole -- is revisable. And since the peak is revisable, the number of days since the peak is also revisable!

2. Katsanos claims that it does not really matter whether the zig reversal is confirmed or not and that it is actually better if it is not confirmed, because the continuation of the trend is what we hope for.

However, I have two objections. First, a trader has to decide if he really needs patterns. You can't say "I am trading flags" without waiting to see if what you are looking at is a flag or not! You may be trading well, but in this case, you are not trading flags. Second, if you use the zigzag indicator to identify a pattern, you have to let the indicator do its job. An unverified zigzag leg is not a leg at all. If you don't need it, then why use it?

3. As Katsanos states, he uses a 17% zig just to make sure he will have a steep-enough pole on the left side of the zig reversal. The problem is that in order to have a 17% reversal (say, a top), one has to wait until the price retraces by 17% and no less! If you don't want to wait until the confirmation of the top, then only the previous bottom of 17% is valid, not the recent peak. Therefore, the second line of Markos' code for the signal to enter long that reads:
  

X:=Barssince(ZZ<Ref(ZZ,-1)

AND Ref(ZZ,-1)>Ref(ZZ,-2));


returns an invalid number of periods, because it refers to a peak and not a trough. And unfortunately, the peak it refers to is a phantom one.

4. The above line cannot be substituted the way Katsanos suggests. He suggests the use of X:= ref(HHV(C,20),-2) as an alternative, but the two statements not only return different values, but they also refer to entirely different classes.

Finally, my remarks refer mainly to the system code, not the exploration code. And they refer to the validity of that code, which will certainly lead to phantom signals, not to the trading idea and the statistical evidence brought. My concerns are not just theoretical. They have been confirmed by traders who already saw their entry signals disappearing after initiating a position. A few successful trades do not prove the scientific accuracy of a method.

Spyros Raftopoulos

Markos Katsanos replies:

You are absolutely right; MetaStock's zig function cannot be used to detect peaks unless the second leg is confirmed. I am not, however, using this function for the purpose that it was originally intended (that is, to detect peaks) but rather to detect a temporary or provisional peak (or reversal) before the original trend is resumed.

As you know, the way MetaStock calculates a zigzag is as follows:

Suppose we use the zig(C, 17, %) function to detect a 17% peak. MetaStock calculates changes in prices until a 17% peak is reached and price reverses to the downside. It then declares a provisional peak and draws the left side of the peak, which can be revised if it is not confirmed (that is, the reversal or the right side of the peak is also 17%).

By the way, this is only true for MetaStock. Other programs (like TradeStation) wait for the second leg (right side) to decline by 17% as well before declaring a peak, and that is probably the reason why my code was not translated for other software.

In detecting flags, I used the zig to detect a 17% rise (on the left side of the peak) but was not interested in a 17% reversal. In fact, waiting for a 17% reversal will only detect failed flags, since the successful ones do not usually decline by more than 13% before breaking out in the prevailing direction (see also the statistics in Figure 1 of my May 2005 article, "Detecting Breakouts From Flags & Pennants").

In other words, I was only interested in failed zigs, or zigs that were not later confirmed, and I used MetaStock's way of calculating the zig for my benefit. This implies, however, as I have also already mentioned in my previous letters, that because the zig will later most likely be revised, this method can only be used with MetaStock explorations.

And my last and most compelling argument is that the exploration code works well and is successful in detecting flags. I have used this exploration for more than a year now and it has produced many profitable trades. I also know that of a number of magazine readers are using it successfully. In fact, one of them (a British broker) liked it so much that he decided to present it at a meeting with clients.

Concerning your comments on the alternative code X:= ref(HHV(C,20),-2), I agree that this cannot be used to detect a peak on its own. It is used, however, in conjunction with condition 2 (17th line of the code):
  

Ref (LinRegSlope(C, 13)/Ref(C,-13)*100,-X1)>2.2


which ensures that the slope of the left side of the peak (the pole) is not less than 2.2% per day.

Editor's note:

Markos Katsanos has contributed several articles to STOCKS & COMMODITIES on the topic of detecting breakouts, including "Detecting Breakouts" (April 2003) and "Detecting Breakouts In Intraday Charts" (September 2003). The articles sparked much interest and discussion, so additional letters from readers with detailed responses from Markos Katsanos can be found in the June 2003 and March 2004 issues in the Letters to S&C column.

In addition, Spyros Raftopoulos was the author of two articles published in STOCKS & COMMODITIES on using zigzag as an indicator: "Zigzag Validity" (August 2002) and "The Zigzag Trend Indicator" (November 2003). And since these articles also sparked much interest and discussion, additional letters from readers with detailed responses from Spyros Raftopoulos can be found in the following issues in the Letters to S&C column: November 2002, January 2004, and April 2004.

All of these articles are available for purchase through our Online Store at www.Traders.com. Past Letters to S&C are available for free viewing at our website. Code published in this column can be copied and pasted from there for readers wishing to try out the code given here.

Readers will also find a new article in this issue by Markos Katsanos titled "Bear Flags" beginning on page 48.

We appreciate the ongoing contributions from both of these authors to the discussion.

SWING TRADER

Editor,

I have browsed your website at www.Traders. com but I have not been able to find specifically what I'm looking for. Maybe you can assist me.

1) I am looking for software to design/develop, backtest, and optimize trading systems/strategies. If you know of such software, please let me know, or if you have an article in your archives that discuss such software, let me know and I will buy it.

2) Please let me know of any articles in the STOCKS & COMMODITIES archives that discuss swing trading strategies.

3) Here's a suggestion: Could you make the entire Novice Trader's Notebook a single PDF article that could be purchased like any other article on Traders.com?

4) Finally, I am looking for the January and February 2006 issues of STOCKS & COMMODITIES. I am interested in the articles on trading systems and strategies for position traders that appeared in that issue. I live in South Africa and I would like to know what is the quickest and easiest way to obtain the issues.

Vivian Taylor
Accenture, South Africa

For your first question, please see the next letter and reply. As for swing trading, we've published many articles over the years on swing trading techniques and also several reviews of swing-trading software. You can use the search engine at our website to help locate them. Here are some articles to mention:

Crane, John [2004]. "Predict, Identify, And Trade Future Market Swings," Technical Analysis of STOCKS & COMMODITIES, Volume 22: February.
Duke, Phillip S. [2003]. "Swing Trading With Trendlines," Technical Analysis of STOCKS & COMMODITIES, Volume 21: November.
Gopalakrishnan, Jayanthi [2003]. Interview: "Alan Farley Of Hard Right Edge," Technical Analysis of STOCKS & COMMODITIES, Volume 21: February.
Gopalakrishnan, Jayanthi [2002]. Interview: "David Landry Of TradingMarkets.com," Technical Analysis of STOCKS & COMMODITIES, Volume 20: March.
Hartle, Thom [1999]. "Gann Swings And Intraday Trading," Technical Analysis of STOCKS & COMMODITIES, Volume 17: October.
Lo, Teresa [2004]. "Swing Trading With Swing Charts," Technical Analysis of STOCKS & COMMODITIES, Volume 22: February.
Star, Barbara [2003]. "Trade The Price Swings," Technical Analysis of STOCKS & COMMODITIES, Volume 21: December.

In addition, here are a few books on swing trading that we've mentioned in our magazine:

Connors, Laurence A., and Linda Bradford Raschke [1995]. Street Smarts: High Probability Trading Strategies For The Futures And Equities Markets, M. Gordon Publishing Group, www.mgordonpub.com.
Crane, John [2003]. Advanced Swing Trading: Strategies To Predict, Identify, And Trade Future Market Swings, John Wiley & Sons.
Hutson, Jack K., ed. [1991]. Charting The Stock Market: The Wyckoff Method, Technical Analysis, Inc., www.Traders. com.
Markman, Jon D. [2003]. Swing Trading: Power Strategies To Cut Risk And Boost Profits, John Wiley & Sons.
Nassar, David, and William S. Lupien [2003]. Market Evaluation And Analysis For Swing Trading, McGraw-Hill.

Concerning the Novice Trader's Notebook at our website, we will pass along your suggestion to our webmaster. As for your query about having back issues sent to you overseas, our subscription department will give you some shipping options.

Thank you for reading STOCKS & COMMODITIES.--Editor

TRADERS' RESOURCE LISTING SUBMISSIONS

Editor,

We operate a real-time news and index-level forum called Hammerstone Institutional Forum. It currently has about 130 full-time members who are all either professional, independent traders or hedge-fund traders.

How would I go about getting our service listed in your Traders' Resource? I would be happy to furnish you with a login to check it out.

Jamie Lissette
Hammerstone, NV

Vendors of products and services related to trading can submit their product information at our website for possible inclusion in one of the product/service categories of our Traders' Resource database. This database is available to our website visitors anytime for browsing or searching. In addition, we publish one category of the database in each issue of STOCKS & COMMODITIES, such as brokerages, trading systems, data services, and others.

To submit your product information to Traders' Resource, or to update your existing listing, go to https://technical.traders.com/products/generalinfo.asp, or simply go to our homepage at www. Traders.com, scroll down to the bottom, and click on "Add a product to Traders' Resource."

Thank you for participating in our effort to collect information that may assist our readers with their purchasing decisions.--Editor

END-OF-DAY DATA, INCLUDING GREEKS

Editor,

I was reading your March 2006 issue and thought that maybe you could help steer me to the correct place.

I am an individual trader of options on US stocks/equities. I perform bull call spreads, bull put spreads, bear call spreads, bear put spreads, call ratio back spreads, and put ratio back spreads.

I am looking for an end-of-day datafeed that includes the following: stock symbol, stock close/last, option symbol, strike, bid, ask, interest, expiration year, and delta. Currently, I subscribe and receive all the above information (except delta) from www.stricknet.com. However, I need the option delta. If I can receive all of the information from another source, I would switch. Alternatively, if I receive the option symbol, expiration year, and delta, I can merge that data with my current source.
Do you know of an end-of-day datafeed that meets my listed needs?

Jeffrey

You should be able to get this from your broker. In addition, two low-cost or free sites that you might want to look at are www.pcquote.com and www.888 options.com.--Editor

PRODUCT RECOMMENDATIONS

Editor,

Your magazine has been quoted on the USEC International website. What is your brief opinion of their products?

Michael Bruce

You can read our review of USEC International's product, "InTeLyze," in the June 2003 issue, available from our Online Store at www.Traders.com.--Editor

ERRATA: SWISS ARMY KNIFE INDICATOR

Editor,

With regard to the January 2006 article, "Swiss Army Knife Indicator" by John Ehlers, I found several errors, such as: page 50, first paragraph, with reference to the bandpass filter, the sentence that reads, "For filters tuned to periods shorter than the dominant cycle in data, the filter response will peak before the peak in data." The next sentence reads the same. But should not the second sentence read, "For filters tuned to periods [longer] than the dominant cycle in the data, the filter response will peak [after] the peak in the data"?

I haven't run proofs on the type of equations given for the Swiss Army Knife (SWAK) indicator since my undergraduate studies. But some of them just don't look right.

In addition, the term "chirped" was never defined in the article. It comes from a frequency shift heard in the receiving headsets, caused by bad filter (low-pass) capacitors in the high-voltage power supply of a old-style Morse code transmitter and/or current amateur radio operators equipment.

John Albers

Editor: First, you are correct that the repeated sentence was a misprint, and it should have read, "For filters tuned to periods longer than the dominant cycle in the data, the filter response will peak after the peak in the data." We regret the error.

As for your other comments, John Ehlers replies:

The SWAK TradeStation code has been tested by many traders and is correct. It has also been successfully translated to other platforms in the Traders' Tips section.

The word "chirp" is an onomatopoeic word to describe a wave having variable frequency. I thought the description of the waveform was obvious.

ERRATA: READERS' CHOICE AWARDS

In the Readers' Choice Awards section of our 2006 Bonus Issue, we displayed an incorrect logo next to the winner of the stock brokerages category. The logo should have been that of the category winner, stock brokerage Interactive Brokers. We regret this error.

Back to May 2006 Contents

Originally published in the May 2006 issue of Technical Analysis of STOCKS & COMMODITIES magazine.
All rights reserved. © Copyright 2006, Technical Analysis, Inc.