June 2008 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


OPTION CREDIT SPREADS

Editor,

I just read Sam Bhugaloo's article on option credit spreads in the STOCKS & COMMODITIES annual Bonus Issue. The article was well written, easily understood, and fascinating. I would like to know if there are any other articles available by the same author.

I have a question relating to the article: When trading option credit spreads on commodities, how many front months should I be considering?

Jacques

Sam Bhugaloo replies:

I am pleased you enjoyed the article.

When trading bull put option credit spreads or bear call option credit spreads, you should consider the commodities with 50-90 days' expiration. Remember that time decay is your friend, so you don't want to trade months that are too near or too far out.

I have had two articles published previously in S&C: "The Power Of Implied Volatility" (July 2006) and "Watch The Commercials" (October 2006). I believe both of these articles can be purchased from the STOCKS & COMMODITIES online store at www.Traders.com.


Editor,

That was an excellent article on option credit spreads in your 2008 Bonus Issue. I was interested in the probability calculator, which I have never seen before. I checked on the Internet and found only a few, though they aren't the one you used. Where can I get the one you used?

Mike
 

Sam Bhugaloo replies:
The probability calculator featured in my article was provided by OptionVue, and it is still available at no cost. It is not sold as a standalone package. The website link is:

https://www.optionvueresearch.com/webtools2/ProbabilityCalculator.asp

Here is a link for another probability calculator for your interest -- https://www.pfgca.com/options/probability.htm -- although I prefer the OptionVue calculator.


Editor,

I am very interested in Sam Bhugaloo's article that appeared in the 2008 Bonus Issue of S&C, "Option Credit Spreads." Does the author offer a video tutorial or more information so I can immerse myself in this technique?

Roger Frost
 

Sam Bhugaloo replies:

Thanks for your email and I am glad you enjoyed the article. The response to the article to date has been fantastic.

I have tried to explain this complicated technique in the simplest manner and I will be releasing a tutorial video in the near future to expand on the techniques. I will keep you posted.

You may be interested in my other published articles on implied volatility and the Commitment Of Traders report. The articles are available at the STOCKS & COMMODITIES online store at www.traders.com.
 

BOOKS ON FOREX USING P&F CHARTS

Editor,

In your April 2008 Letters To S&C section, a reader asks for recommendations for books that show the methods and techniques for trading forex using P&F charts. The letter was prompted by James Chen's February 2008 Forex Focus article, "Point & Figure For Forex." In response to the letter, Chen recommends Thomas Dorsey's book, Point & Figure Charting, as being the best and most comprehensive book for all markets.

No single book can claim to be the best and most comprehensive current book on P&F charting for all markets, since markets are complexified and variegated. I teach forex trading using P&F charts, and I would like to mention the book Exchange Rate Analysis With Point & Figure Charts by Friedrich W. Tolke, published by Peter Lang of the European University Studies, Frankfurt am Main. This classic book is published in three different language editions.

Vini Mbah

MUTUAL FUND TRADING

Editor,

In your April 2008 issue of S&C, your Traders' Resource section featured mutual funds. While pointing out the various costs that need to be borne in mind when trading mutual funds, your article neglected to include the recently imposed SEC frequent-trading restrictions/redemption fees that may apply to many mutual funds.

These restrictions can affect the timing of your trading through 30- to 90-day holds or blocks on purchases of mutual fund shares. This will have a detrimental impact on trading if your indicators are for shorter holding periods. Redemption fees of 1-2% of your assets can be assessed on the holdings of many mutual funds, thus significantly eating into or even generating actual losses on what a model may have assumed was a winning trade. Because there is a "backdoor" application of these restrictions on omnibus accounts, the rules affect 401k and other retirement plans as well.

Many plan sponsors have also adopted frequent-trading restrictions that may be more restrictive than the mutual funds' policies of the funds offered in the plans.

Anyone wishing to apply technical analysis methodologies to mutual fund trading should be aware of any restrictions on trading that may apply to the mutual funds they are considering and/or to their retirement plan assets.

Stephen Tabb
Tallahassee, FL


DETERMINING THE END OF THE TREND

Editor,

I was impressed with Jody Samuels' article "Determining The End Of The Trend" in the STOCKS & COMMODITIES Bonus Issue and found it potentially very helpful. However, I was unable to duplicate the oscillator readings indicated in Figure 4 using the standard MACD histogram with settings of 5/34/5. I tried it on several charting platforms. I also added a five-period SMA to the MACD histogram to get the signal line referred to in the article, but this didn't match that of Figure 4 either. What might I be doing wrong?

Further, in Figure 3, I was unable to determine how the author found the length of wave 1 to be 1.3170. Could you comment on that?

Finally, will this method work on equities as well?

Thank you for your assistance with these questions.

Bob Hug
Savannah, GA
 

Jody Samuels replies:

In the chart in Figure 4, I was able to duplicate Bill Williams' Awesome Oscillator by using the MACD histogram with the settings 5/34/5. I then created an MACD with the five-period signal line and copied that to the MACD histogram. Make sure the signal line is a simple moving average (SMA). The other suggestion I have is to ask the developer of the charting package to incorporate Bill Williams' oscillator into it. Many charting packages already have it under different names, such as "chaos indicator" or "Awesome Oscillator" (AO).

Regarding the length of the wave, to calculate 100% of the wave 1 target for wave 5, you have to measure the length of wave 1 from start to finish (1.2325 - 1.1638 = 687 pips). Then you add this measurement to the start of wave 5, or the end of wave 4 (wave 4 bottom = 1.2483 + .0687 = 1.3170). This is called the equality with wave 1 target for wave 5.

Finally, you asked whether this method will work on equities as well, and the answer is, unequivocally, yes!

Editor's note: For more in-depth information on Williams' oscillators, please refer to the book Trading Chaos, second edition, by Bill Williams, or visit the website of Bill Williams and Justine Williams-Lara (Profitunity Trading Group) at https://profitunity.com.

For a list of charting software that includes the Williams' indicators and oscillators, visit the Profitunity website.--Editor



DOW THEORY

Editor,

Regarding the February 2008 article "Confirmation Destination" by David Penn, I've done extensive studies regarding Charles Dow's work through Victor Sperandeo's books and interpretations. Sperandeo's work is based on strict interpretation of Dow theory. The whole "mathematics" concept is to help distinguish a true secondary, with economic repercussions, from nothing more than a sneeze in China, such as happened in the first part of 2007.

By establishing characteristics such as 33% to 66% retracement, one can look at certain short-term corrections and see them as nothing more than a reaction and not a true correction. Penn repeatedly talks about the secondary in 2006 as having some significance to Dow theory, which it has none that I make out.

Once a secondary has been confirmed by new highs by both the Dow Jones industrial and transportation averages, which it did, it has no other significance than signaling that the trend is intact and that the economy should stabilize and resume further growth for the time being.

To me it seems as though the most significant, and subjective, aspects of Dow theory have been left out. That is, during a correction, to qualify as a secondary, some economic event must be present such as an economic slowdown that identifies the secondary as such. As the market bottoms and signals that this slowdown should have run its course by turning up but fails to reach new highs together to confirm, and then turns down and takes out the prior lows, this signals a long-term change in trend.

In a bull market, this would be known as the beginning of a bear market. These long-term signals are the most important information that can be acquired from proper interpretation of Dow theory.

Thomas J. Swisher II
Twin Falls, ID
 

David Penn replies:

Thank you for your feedback. As I stated in my article, I depart from traditional Dow theory by allowing for corrections half as severe as Vic Sperandeo notes. I also stated that the mathematics of the correction are not as important to me as the way the market reacts to the correction.

We appear to differ in our application of Dow theory in that you feel my secondary reactions are too small in size, but in my view, your minor corrections are too long in duration. However, we still wound up with the same conclusion: the market was likely to rally into 2007, which it did.

Editor's note: David Penn is now a senior editor for TradingMarkets.com.



RSI BANDS AND REVERSE ENGINEERING

Editor,

Regarding François Bertrand's April 2008 S&C article, "Visual Variation On An Index: RSI Bands," I would like to point out that the idea of the article is not new. S&C readers can read my June 2003 S&C article, "Reverse Engineering RSI," and check the paragraph under the subheading "The RevEngRsi as a level curve" on page 28.

The RSI bands (referred to by Bertrand) are exactly the 30 and 70 level curves used for my RevEngRSI indicator shifted by one day into the future. Further, the AmiBroker code provided in Bertrand's article provides essentially the same indicators -- shifted forward by one day -- as the code that appeared in the June 2003 Traders' Tips section that accompanied my article (although possibly with some very small, negligible differences in values possibly due to calculation matters). S&C readers can check this their own by going to: 

https://www.traders.com/Documentation/FEEDbk_docs/Archive/062003/TradersTips/TradersTips.html#amibroker2
I certainly endorse the use of my published work by others writing articles, since this is the point of making formulas or ideas available to the public. But my work should be attributed and referenced when my formulas and ideas are used in an article, rather than having the article promoted as a new idea.

I generally try to attribute the necessary credits to anyone who inspires me to write an article, either in the body of the article or at the end as a reference. Further, I consider this a must when I am about to use other researchers' ideas. In my June 2003 article, I specifically quoted Constance Brown's book, Technical Analysis For The Trading Professional, as what sparked me to create the RevEngRSI indicator. I don't know whether Constance Brown was the originator of the reverse engineering idea, but her work is where I got the spark. Although my article contains innovative work not previously published and I could have simply presented my RevEngRSI formula without any further reference, I was honest enough to mention Brown in my article.

Again, I endorse the use of my published formulas to create articles, but only with the proper references to my research contribution. Aspiring authors must also be aware that original and smart ideas should be published in hardcopy, well-known, discrete, and highly regarded magazines like, for example, this one in order to safeguard their research work and to have proof of the originality of their work.

If I am wrong or am missing something, I sincerely apologize.

Giorgos Siligardos
 

Thank you for writing. We, as well as our authors, appreciate the importance of crediting and referencing sources. At times, advancing and perfecting techniques is the result of building on the work of others. At other times, ideas are independently developed, as was the case here. Unfortunately, we can't always know what influences and inspirations went into an idea (and occasionally the author may not know himself), although we appreciate the opportunity to mention your June 2003 article now and will also include this reference with the archived edition of the article.--Editor



TEMA, HEIKIN-ASHI FORMULAS

Editor,

I am interested in getting the code for the moving average crossover technique discussed by Sylvain Vervoort in the May 2008 issue of S&C ("The Quest For Reliable Crossovers") for the thinkorswim platform. Please advise.

Jibin Thomas
 

Unfortunately, we cannot offer the thinkorswim formulas. Please contact the developer of thinkorswim at www.thinkorswim.com or support@ thinkorswim.com for technical support. Thank you for writing.--Editor

CODE AT TRADERS.COM

Editor,

Thanks for a great magazine. I am a Germany-based subscriber since last August and I truly appreciate your magazine. It helps me advance my trading and market knowledge tremendously!

One wish, though (and maybe it's already granted somewhere and I just missed it): Since not everyone over here is using Tradestation/EasyLanguage (and since you're going the extra mile to publish code for other programming languages anyhow), could you put the code for AmiBroker (and maybe other programs too) on your website for subscribers to download? One zip file per issue or so would do, or even just keep adding them into one zip for the current year to make things easy on the webmaster.

Theo Beisch
Regensburg, Germany
 

Thank you for writing. There are two areas of our website where published code is posted: one is in the Traders' Tips area (https://www.traders.com/Documentation/FEEDbk_docs/backissues.html), and one is in the Subscriber Area (https://technical.traders.com/sub/sublog.asp). Both of these areas are links off our home page at www.Traders.com.

In our Traders' Tips area, we post code that appeared in the Traders' Tips section of our magazine. You can either scroll through our back-issue archive to browse the Traders' Tips sections, or use the search engine at our website to help locate items of interest.

In our Subscriber Area, we post code that appeared in articles (for example, code listings that appeared in article sidebars).  Login requires your subscriber number (found on your magazine mailing label) and last name.

In addition, if you are looking for code that was published in our Letters To S&C column, you will find all past Letters To S&C columns posted at our website as well.

The code posted at our website is not in a downloadable zip format but is provided as text and can be copied and pasted into your program.

Finally, if we haven't published the particular code you are interested in getting, you could try checking the website of the program you are interested in for code, or contact their technical support or user forums to request custom code.--Editor



ARTICLES ONLINE

Editor,

Is there some way to download/print an article for study/reference? I am interested in an article in your current issue.

Johnathan
 

Articles from our current issue are not available online. They appear only in the printed magazine. Past articles, however, are available at our online store at www.Traders.com.

After an issue is no longer current, the articles in it are made available for downloading through the store.--Editor


Back to June 2008 Contents

Originally published in the June 2008 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2008, Technical Analysis, Inc.