November 2007 Letters To The Editor
or return to November 2007 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
METASTOCK FORMULAS FOR TRENDLINE BREAKSEditor,
Is there anywhere on the website to find the code for trendline breaks in the September 2007 issue? It seems like I'm always entering the MetaStock formulas by hand. I am a long-time subscriber.
Jack Williams
You will find formulas and code from S&C articles posted to the Subscriber Area of our website, at https://technical.traders.com/sub/sublog.asp. (Scroll down past the Optimized Trading Systems section.) Login to the Subscriber Area requires your subscriber account number (found on your mailing label) and last name.
HOW EFFECTIVE ARE RECTANGLES?Editor,
I have read Markos Katsanos' latest article in the June 2007 S&C, "How Effective Are Rectangles?" I have found that the rectangle breakout predictor does an amazing job of hitting the projected target each night on the ES emini. Because of this, I have taken a great interest in Katsanos' articles.
Does Mr. Katsanos have more indicators for looking at the eminis? I believe it isn't everyday that one finds a piece of human intelligence wrapped up in computer code so perfectly!
Finally, is there a certain way to use rectangle breakouts? I wasn't able to find any information about using it to its full potential.
I look forward to any helpful information Mr. Katsanos can offer until his book comes out.
Michael Elzanaty
AustraliaMarkos Katsanos replies:
I did not test the rectangle formula on the emini. Thanks for pointing this out. You might also want to check out the formula for flag formations. However, I haven't tested this on the emini either.
An article on bullish flags was published in the April 2005 S&C and my article on bearish flags was published in the May 2006 issue of S&C.
The money flow system that I discussed in my September 2003 article, "Detecting Breakouts In Intraday Charts," might also work with the emini.
Let me know if you have any luck.
PS. If you have a problem finding the magazine on the newsstand in Australia, why not subscribe?
ARTICLES ONLINE?Editor,
I enjoyed Sylvain Vervoort's "Trading Trendline Breaks, Part 2" but wanted to also read part 1. I found part 1 listed on your website as being in the July 2007 issue, but I could not figure out how to download the entire article. Is the article available online in its entirety?
I am a new subscriber -- August was my first issue. I love the magazine. Highly informative and entertaining. I find myself reading cover to cover and then rereading particular articles multiple times.
In each of the two issues I have received, I found valuable information that I have already incorporated into my trading.
John T. Dzialo
Fullerton, CAWe are glad to hear you are finding useful techniques in the magazine to apply to your trading.
Abstracts of all our articles are displayed at our website by issue so users can see sample content and a contents listing for each issue. To download the entire article, you must use the Online Store link. (Click on "Online Store" in the red box at the left-hand side of the screen, or go to https://store.traders.com.) From the Online Store, entire articles from past issues can be downloaded as PDF files. Note: Current articles are not available as downloadable articles.--Editor
DeMARK & THE ALLIGATOREditor,
Do you have any (detailed) information available about Tom DeMark's methods and the indicator called alligator?
Vandamme Edwin
BelgiumSorry, we have not published any articles on the alligator indicator, although the alligator indicator was mentioned as being included in Profitunity's product, Profitunity Home Study Course, in a review I wrote appearing in the August 2007 issue.
We interviewed Thomas DeMark in the January 1995 issue: "Exploring The Science Of Technical Analysis With Thomas R. DeMark." We also published an article by DeMark in our August 1997 issue, "The TD Range Expansion Index."--Editor
STOCKTRADINGEditor,
How do you help active and swing traders to foresee the overall market and also find stocks to trade?
Siamak Rava
This is a very broad question. We publish articles in every issue about price forecasting, stock selection, and related topics. So keep reading STOCKS & COMMODITIES, and if you would like to supplement your reading, we also offer two online publications, Traders.com Advantage and Working-Money.com. You can find more information about these at our website, www.Traders.com.
--Editor
FIXED-FRACTIONAL POSITION SIZINGEditor,
I thank Christian Smart for his careful and considered answers to my original comments and questions [published in the October 2007 Letters to S&C column] about his August 2007 article, "Fixing The Flaws In Fixed-Fractional Position Sizing."
I have some additional comments:
1) I was able to replicate, using Microsoft Excel, Figure's 4 data for the first case of expected fixed-fractional (Eff) ending equity of $617,693,297 by using the fixed-fraction (FF) approach but increasing the bet size to 2.3125% (from 2.0%). Running Excel with different seeds, I got an equity of $619.3 million, which is close to the desired $617.7 million and with a maximum drawdown (MDD) from -39.4% to -47.4%, which is close to the value given in your article of -50.57%. Thus, it seems to me that just bumping up the FF, as I did, is equivalent to the EFF method (which I still am having trouble understanding...) and is conceptually easy for me to understand.
2) The EFF formula seems to give the following value (as Dr. Smart stated in response to my last letter): Amount risked/Trade = Initial equity * [1.004]^N * FF but initial equity =$1 (not $100,000) and expectancy = 0.2, FF = 2%. Thus: Amount risked/Trade = [1.004)^N * 0.02 (again, no $100,000 involved). I understand N runs from 1 to 5,000, so how do I apply that equation similarly to what I can do in Excel for the FF calculation?
3) I still don't understand the relevance of average return (0.4%) in a mathematical world of compound returns such as 0.3573%. What about my earlier example of two 10% returns having a compound return of 1.21 (21%), where an average value of 10.5% does me as much good. I see no point in calculating a new return of (1.105)^2=1.211 and then asking for a new compound approach to replicate that number (21.1%).
In summary, I see no "gap" to fill with the EFF approach, and if I'm wrong, then boosting the bet amount accomplishes basically the same thing (equity and perhaps a bit lower maximum drawdown).
Another reference for your interest might be Phil Abel's S&C article "Casino Trading" in the November 2003 issue. He has some data on a 0.35 win ratio, win bet 2%, losing 1% Monte Carlo study.
Would it be possible for you to send me a copy of Michele Gambera's article you mentioned?
Finally, could you send me the data in Excel format so I could study it to help me understand the Eff $617,693,297 result?
Norm Brown
Christian Smart replies:
The main thing to keep in mind is that the difference between fixed-fractional (FF) and expected fixed-fractional (Eff) is that the basis of the amount risked is different. With FF, the trader is risking a percentage of actual equity, while with Eff, the trader is risking a percentage of expected equity. For a given percentage, I have shown that Eff trounces FF in pure return. The reason for this is related to compound interest.
When an investor receives compound interest for a certain investment (same return at each interval), an investor is receiving a fixed-income stream, and is receiving exactly what is expected. When the returns contain uncertainty (nonzero probability of encountering a loss), things change, and placing bets based on actual returns as in FF results in returns that, in the long run, are smaller than expected equity.
However, one can achieve the expected equity for a system by making bet sizes based on expected equity. That's the key term here -- uncertainty. When you are looking at compound interest for certain returns, there is no gap. But when you introduce uncertainty, compound interest becomes more complicated. Making bet sizes based on actual returns reduces overall performance in the long run, at least compared to calculating bet sizes based on expected returns. Mathematically, when the expected return is 0.4%, when the returns are certain, the compounded return is equal to 1.004^N for N trades.
But when returns contain uncertainty, and bet sizes are placed based on actual equity, the compounded return is less than 1.004^N. However, calculating the amount risked based on expected equity allows a trader to achieve a compounded return equal to 1.004^N (for the example we have been discussing, it is 1.003573^N). There is a gap, and it is caused by uncertainty in the returns. Ramping up FF is not equivalent to EFF. The two should be compared based on the same percent risk. If you ramp up FF, you can similarly ramp up EFF by the same amount. The equity curves for FF and EFF are quite different, regardless of the amount risked.
Using the example we have been discussing, for a system that returns twice the bet size with a 40% probability, but loses an amount equal to the bet size 60% of the time, consider the following sequence of trades: L,L,L,L,L,L,W,W,W,W, or six losses in a row followed by four consecutive wins. With a beginning equity equal to $100,000, the expected equity after 10 trades is equal to $104,072 (=100,000*(1.004)^10). With FF, the actual equity after this sequence of trades is equal to $103,631 (= $100,000*0.98^6*1.04^4), while with EFF the actual equity after 10 trades is equal to:
$104,365 (=$100,000*0.02[*2*4*
(1.004^6+1.004^7+1.004^8+1.004^9)-6*
(1+1.004+1.004^2+1.004^3+1.004^5)]).This latter formula looks complicated but is easy to implement in a spreadsheet. For EFF you need two columns: one for the expected equity, and another for EFF in which bet sizes are placed based on the expected equity column. Note that as N increases, EFF converges to the expected equity while FF converges to a much smaller amount.
Finally, you can find Michele Gambera's article at:
https://findarticles.com/p/articles/
mi_m1094/is_3_37/ai_90702240
GOOD ARTICLE, WRONG CONCLUSIONSEditor,
In "Search For the 10-Bagger Fundamentals" by Thomas Maskell (September 2007), the author discovers one correlation after another, points them out, but then ignores them.
Here are several examples:
1) "About 75% of the 10-baggers have a negative EPS compared to just 10% of the overall market." To me, that's a huge green-flag correlation worthy of a lightning bolt.
2) "...only 3% of all 10-baggers have an Eps over $1." This means an astounding 97% of 10-baggers have an EPS of $1 or less. It seems to me that investors should consider that percentage an amazing fundamental to use when screening for potential 10-baggers. And yet the author doesn't even seem to consider it.
3) "...as a group, the 10-bagger's earnings looked better a year before their move... If there was any EPS trend at the move, it was downward." Then the author states, " EPS trends would not help us spot these 10-baggers." Hello? Anybody home?
These examples will suffice, but there are still more correlations that he points out and then ignores in the article. Maybe he is so entrenched in the commonly accepted view that only positive fundamentals can be used as a screen, that he completely misses the incredible results of his own research. In truth, performing a screen using all the criteria that he discovered would probably still leave you with too many stocks to be useful. However, if someone did additional studies looking at stock price, relative strength, volume, and so on, you might come up with a highly useful 10-bagger screen.
It seems to me the author has performed good research and made some important findings, even if he didn't recognize them himself.
Jerome Siesholtz
North Miami Beach, FLThomas Maskell replies:
Let me make a point in answer to your critique: The article was not seeking correlations; it was seeking cause and effect. There are many correlations that are meaningless and therefore not predictive.
Since the purpose of the article was to view 10-baggers from an investor's perspective, and investors rely on fundamentals, I was looking for correlations that predicted success or even caused it. For instance, you note that 75% of 10-baggers have a negative Eps compared to just 10% of the overall market. In any given year, there might be 30 10-baggers ready to launch. This correlation narrows the odds from 30 out of 9,000 to 30 out of 900, or in others words, to a confidence level of just 3.3%. So many correlations exist, but with very little confidence, and investing is all about confidence.
While I did not do it, I imagine that if I were to study companies that went bankrupt in the past five years, I would find that prior to their going belly-up, they would also have had negative Eps. So I am left with the question of what separates the losers from the winners so that readers of my article will at worst be stuck with some also-rans that track the general market rather than losing all their money. But that is a different article that you will have to wait to read. (The Sec is very strict on insider information!)
So you are absolutely right: There are many correlations in the article, but none of them rose to the level of cause-and-effect. Thus, I did not instruct readers to scour the bottom of the pond for these diamonds in the rough. Let me assure you, if one or more of those fundamentals indicated that a 10-bagger was on its launch pad, I would have gladly shouted it from the rooftops. Not to mention, bought a few thousand shares for myself.
Thanks for the critique. It's nice to know people read the article and were moved to comment. And in answer to one of your questions: Yes -- there is someone home.
ERRATA: DOUBLE CALENDARS AND CONDORSIn the June 2007 article, "Double Calendars And Condors," in the first yellow box under "case study," an incorrect number appears in the total. The line "Total credit, calls and puts = 1.35" should have read "Total credit, calls and puts = 1.25" (0.70 + 0.55). We regret this error.
Back to November 2007 Contents
Originally published in the November 2007 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2007, Technical Analysis, Inc.