In Shock
by Adrienne Laris Toghraie
Trading is unique in that the uncertainty of the markets
brings to bear an unusual stress level. What should you do if
your trading suddenly turns south, or worse, a tragic event
occurs?
Recently, I was in an automobile
accident when a cab driver sped
through a four-way stop sign as
I was entering the intersection.
For a spell, I felt lost in time. In
that moment of unreality, I even
thought that it was all a dream.
I was in shock.
By Adrienne Laris Toghraie.
The Nature Of The Market Is Change:
Bruce Kamich
Technicians follow numerous markets, and some specialize in specific areas,
such as equities or fixed income. With the Treasury bond yields recently hitting
lows that were unthinkable by most only a few years ago, we thought that
talking to a specialist in this area would be apropos. Meet Bruce Kamich, who
is senior vice president for research, development and management of the
electronic financial information service MoneyWatch for McCarthy, Crisanti
& Maffei, and currently, he's on the board for the Market Technicians
Educational Foundation.
By Thom Hartle.
Life Cycle Model Of Crowd Behavior
by Henry O. Pruden, Ph.D.
For a large part of the past 30
years, the discipline of finance
has been under the aegis of the
efficient market hypothesis.
But in recent years, enough
anomalies have piled up, cracking
its dominance of the field.
As a consequence, the arrival
of new thinking to explain
market behavior has warranted
attention, and its name is behavioral
finance.
By Henry O. Pruden, PhD.
Multiple Time Frame Using Swing Robert Krausz, who was featured in Jack Schwager's
New Market Wizards, follows up his previous article
on the new Gann swing chartist with a detailed
presentation on using channels for setting up trading
opportunities.
In my previous article on dy-namic
multiple time frames, I
introduced one of my own ap-proaches
to trading: The con-cept
of multiple time frame trad-ing.
The essence of the strategy
is easy: Use the higher time frame
price activity to define the trad-able
trend as well as potential
support and resistance levels.
By Robert Krausz, MH, BCHE.
Seasonal Adjustment
Of Time Series Data
by George R. Arrington, Ph.D.
While time series data is the heart of most technical trading
systems, some have a tendency to reflect seasonal patterns;
for example, agricultural commodities tend to follow harvest
cycles. Here's how to adjust data to see nonseasonal patterns
more clearly.
Time series data, which is data
such as most price and volume
data collected sequentially over
time and usually at fixed inter-vals,
is the basic fuel for most
technical trading systems.
By George R. Arrington, PhD.
Support And
Resistance
by Stuart Evens
Support and resistance are basic tools used by traders to
identify key reversal areas. Here's a look at the basics of
support and resistance levels and how to determine which
levels might be important in the future.
One premise of technical analysis
is that stock prices are affected
by support and resistance.
As those terms imply,
support acts to keep a stock's
price above a certain level,
while resistance acts to keep a
stock's price below a certain
level.
By Stuart Evens.
The Tactical
Trader
by Walter T. Downs
Trading can be compared to the game of chess—a good
player wins by implementing a tactical strategy that entails
sacrifices when the sacrifice is justified. Here, a professional
trader presents some tactical trading concepts.
In chess, a good player is able to
accurately assess his position
on the board and gauge the psychological
mettle of his opponent.
Victory is gained by
implementing a positional and/
or tactical strategy.
By Walter T. Downs, PhD.
Here is this month's selection of Traders' Tips, contributed
by various developers of technical analysis software to help
readers more easily implement some of the strategies presented.
Internet users will also find these and some previous
Traders' Tips on our home page at https://www.traders.com.
Our focus this month in Traders' Tips is on the cup-with-handle
chart pattern that Rick Martinelli and Barry Hyman
explored in the October 1998 STOCKS & COMMODITIES in
"Cup-with-handle and the computerized approach."
By Technical Analysis, Inc.
Triangles: Reversal
Or Continuation
by Stuart Evens
Look at most any book on the subject of technical analysis,
and you'll come across triangles. These formations are usually
one of the first chart patterns that novice technicians study,
and it deserves some examination.
Triangles are classified as reversal
patterns in some reference
works, while they are described
as continuation patterns in others.
By Stuart Evens.
LETTERS TO S&C
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? Have you
run across trading techniques, services or products that have proved useful? Tell us about
it. Without a source of new ideas and subjects coming from our readers, this magazine would
not exist.
By Technical Analysis, Inc.
Designer
Funds
by Gary H. Elsner, Ph.D.
Mutual funds show a less than stellar performance relative to
the Standard & Poor's 500 index. It should come as no
surprise, then, that Wall Street has responded by offering
products that mimic the S&P 500. Going a step further, some
funds are set to do the exact opposite of the S&P 500 and
thereby offer a hedge. Here are some guidelines.
The right financial instruments
are the keys to great investing.
By Gary H. Elsner, PhD.
Directional
Movement
by Stuart Evens
There's no way around it: Traders trade the trend, be it short
term or long term. It follows, then, that there is a need to
identify when a market is trending. Here's J. Welles Wilder's
directional movement, a set of technical indicators designed
to recognize trending markets.
Most technical trading methods
can be categorized into one of
two types: Trend-following,
which involves taking trades
with the trend, or range trading,
which involves looking for reversal
points in a trading range.
By Stuart Evens.
Trading Success As A Point Of Reference: Ari Kiev, M.D.
Ari Kiev started out working with suicidal patients before going on to work
with athletes and now as a trader's coach. He is a management consult-ant
to several trading firms and is the author of numerous books,
including the recent Trading To Win: The Psychology Of Mastering The
Markets. STOCKS & COMMODITIES Editor Thom Hartle interviewed Kiev
via telephone on November 24, 1998, asking him about working with
traders, his new book and more.
I argue that profitability isn't dependent on the market.
By Thom Hartle.
Log Spirals
In The Stock Market
by William T. Erman
The basic mathematical characteristic of the log spiral is that
even while increasing or decreasing in size, the log spiral
remains constant. This is also true for rectangular spirals,
the parameters of which are determined by their related log
spirals. Many major market moves share the properties and
predetermined progression of these spirals, indicating the
close correlation between multiple manifestations of the
ordered form of nature and the architecture of markets
themselves.
By William T. Erman.
Moving Averages,
First Principles
By Brian J. Millard
Don't quite understand moving averages, but think that you
could benefit from using them? Here's how to understand
and apply moving averages to identifying trends in stocks.
Of all the technical indicators,
moving averages are perhaps
the most widely used and misunderstood.
Incorrectly applied,
as is usually the case, they may
be responsible for more losses
than any other indicator. Correctly
applied, however, they
can be the most versatile and
powerful tools available.
By Brian J. Millard.
TRADERS' TIPS
Here is this month's selection of Traders' Tips, contributed by
various developers of technical analysis software to help readers
more easily implement some of the strategies presented. Internet
users will also find these and some previous Traders' Tips on our
home page at https://www.Traders.com.
✦ METASTOCK
In "Trading Stocks With A Cyclical System," Jeffrey Owen Katz
and Donna McCormick introduce a system based on stock cycles.
In MetaStock 6.5 or higher, you can easily recreate this system.
By Technical Analysis, Inc.
Trading Stocks With
A Cyclical System
by Jeffrey Owen Katz, Ph.D., with Donna L. McCormick
There may be a tradable pattern in individual stocks
and indices. Read about one way to systematically
look for and track this cycle.
More than a decade ago, we noticed
that a recurrent pattern
could be seen on the charts of
individual stocks as well as on
the indices. Roughly 90 calendar
days after the occurrence of
a large, sudden, strong move
(mostly upward but sometimes
down), there would be a fairly good probability that
another such move would occur.
By Jeffrey Owen Katz, Ph.D., and Donna L. McCormick.
Treasury Bonds And Gold
by Alex Saitta
Intermarket analysis, the comparison of price relationships
between two different markets, is a valuable tool for traders
and investors. Regular news reports often account for one
market's trend for the day as reacting to the change in
another. Interest rates and gold have had such a relationship
to keep an eye on over the years, but the gold market has been prices fall because bond participants fear signs of inflation.
By Alex Saitta.
LETTERS TO S&C
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? Have you
run across trading techniques, services or products that have proved useful? Tell us about
it. Without a source of new ideas and subjects coming from our readers, this magazine would
not exist.
By Technical Analysis, Inc.
A Rationale For Managed Futures
by Charles R. Lightner
Although the futures markets are widely misunderstood even
among knowledgeable investors, they serve a critical purpose
in our economy; through the managed futures industry,
they provide an important investment opportunity for both
institutions and individuals, and they need not expose the
investor to unreasonable levels of risk.
Stocks, bonds, and real estate are
the largest and best-known types
of investments in our economy.
By Charles R. Lightner.
Bollinger Bands
by Stuart P. Evens
This indicator combines popular technical methods—moving
averages, support/resistance, and envelopes—with
statistical analysis to create a powerful technical analysis
tool. Bollinger Bands, used in combination with the relative
strength index (RSI) to analyze a market, enables us to
develop a method to enter and exit trades and review the
historical results.
On a day-to-day basis, markets
trade in a volatile fashion
around the trend. To better see
the trend, traders use moving
averages to filter the price action.
By Stuart Evens.
Tales From The Front: Robert Zellner
Robert Zellner, whose career has ranged from academic to institutional
trader to business manager before settling on full-time private trader,
started off with his sights aimed on academia, despite a grandfather who was
a speculator in the 1920s and 1930s. But it wasn't long before the family
genes came into play and Zellner stepped into the trading arena. He has
worked for Cook Industries; Drexel Burnham Lambert; and Citibank
Futures, among other financial firms.
By Thom Hartle.
Technical Studies And The Primary Cycle
Cycle analysis offers the opportunity to identify windows
of potential market bottoms and tops. Technical
indicators can be used to time entries and exits in the
stock at key points in the cycle. How well does this
concept work?
The primary cycle in the stock
market is the centerpiece of cycle
analysis for traders as well as an
important market timing tool for
investors. Typically 17 weeks in length—with a
window, or orb, of four weeks—the primary cycle
is composed of smaller, short-term, subcycles known
as phases.
By Raymond A. Merriman.
The Maximum Favorable
Excursion Strategy
by David C. Stendahl and Leo J. Zamansky
Maximum favorable excursion (MFE) is the peak profit that
a trade earns before the trade is closed out. Reviewing the
performance of a trading system allows us to measure the
tendency of the MFE of the trades. This article explains how
to use the information to enhance profitability.
By D. Stendahl and L. Zamansky.
For those traders who want a clear and
brief explanation of various concepts often
touched on in technical analysis and trading,
we offer Traders' Notes.
INTERMARKET ANALYSIS
Intermarket analysis, one of the pillars
of technical analysis, is the comparison
of the price action of one market to
another. This comparison can be as
simple as placing two different charts
side by side. The most widely endorsed
use of intermarket analysis hails from
the Dow theory, whereby the movement
of the Dow Jones Industrial Average
(DJIA) is compared with the Dow
Jones Transportation Average (DJTA).
By Technical Analysis, Inc.
TRADERS' TIPS
Here is this month's selection of Traders' Tips, contributed by
various developers of technical analysis software to help read-ers
more easily implement some of the strategies presented.
Internet users will also find these and some previous Traders'
Tips on our home page at https://www.traders.com.
In this issue's interview with Robert Zellner, Zellner describes
a stochastic oscillator model with a fixed-bar exit.
By Technical Analysis, Inc.
LETTERS TO S&C
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? Have you
run across trading techniques, services or products that have proved useful? Tell us about
it. Without a source of new ideas and subjects coming from our readers, this magazine would
not exist.
By Technical Analysis, Inc.
Compound Pivots
And Market Symmetry by William T. Erman
Many traders see only simple symmetry such as a 20-week
bottom-to-bottom move followed by another. Unfortunately,
if indeed there is another 20-week cycle, it could very well
turn out to be 18 weeks or 22 weeks instead of the anticipated
20. Ermanometry, which was introduced to STOCKS & COM-MODITIES
readers in February 1999, considers a 20-day
window, the four-week spread, to be of little help in today's
complex markets.
By William T. Erman.
The Holy Grail Of Trading Is Within Us All: Van K. Tharp, Ph.D.
Psychologist and trading coach Van K. Tharp is the president of the
International Institute of Trading Mastery, Inc. He has spent the last 15
years working with more than 4,000 traders, and through this work, he has
managed to identify themes and characteristics that are key among successful
traders. He's developed a home study course on the trading process, but
his recent work has to do with the psychology of system development.
By Thom Hartle.
Some Rules
To Trade By by Daryl Guppy
A good trader will have a trading plan. Here are some
guidelines for setting up your own trading rules.
In a raging bull market, it is
easy to forget that markets
make us pay for our mistakes.
In a bull market, the rules are
loose, the fools are many, and
money seems inexhaustible. In
a bull market, traders from
Main Street apparently make
money as easily as traders from
Wall Street.
Eventually, however, the
novice trader must reach deep
into his pocket to pay for his or her losses.
By Daryl Guppy.
LETTERS TO S&C
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? Have you
run across trading techniques, services or products that have proved useful? Tell us about
it. Without a source of new ideas and subjects coming from our readers, this magazine would
not exist.
By Technical Analysis, Inc.
The Channel
Breakout
System by Mark Vakkur, M.D.
This is one of the simplest and oldest trading techniques,
where trades are initiated based on price exceeding a given
historical level. Here's how the channel breakout system
works using the Value Line index, IBM, and the Fidelity
Southeast Asia Fund.
With the proliferation of affordable
and powerful system-testing
software, it is tempting to
create and optimize increasingly
complex systems with
multiple rules, exceptions, and
corollaries. Often, however,
less is more.
By Mark Vakkur, M.D..
TheDiscreteFourier Transform Illusion by Dennis Meyers, Ph.D.
The Fourier transform is a mathematical technique
for analyzing data to determine cyclical component.
Take a close look.
The Fourier transform is a mathematical
technique named after
mathematician Jean Baptiste Joseph
Fourier(1768-1830).Thatthis
technique, devised long before any
of the modern amenities that we
take for granted today, is widely
used today in science and engineering
for digital signal processing
is a remarkable accomplishment.
By Dennis Meyers, PhD.
The Ulcer Index by Gary H. Elsner, Ph.D.
A good risk index can be useful in the selection of stocks,
funds, and trading systems. Here, then, is the ulcer index, why
it is superior to the standard deviation statistic, and how it
can be used in a variety of personal investing or professional
money management applications.
What is risk, and how is it measured?
Risk is commonly defined
in terms of the volatility of
an investment's total return or
the volatility of the price.
By Gary H. Elsner, PhD.
How To Get Started In Electronic Day Trading:
David S. Nassar
Each day, more and more traders are using computers for the direct buying
and selling of stocks. Is there a difference among the myriad services
available? We went to David Nassar, author of How To Get Started In
Electronic Day Trading, to get the rundown on what is available for today's
traders. STOCKS & COMMODITIES Editor Thom Hartle interviewed Nassar
via phone on February 23, 1999, about the difference between online
trading and electronic direct access trading, what to consider if you
seriously want to daytrade, and more.
By Thom Hartle.
Of Gold And Bonds,
Gold Is The Leader
by Alex Saitta
Does gold lead the bond market, or is it the other way
around?
Previously, we uncovered strong
coincidental relationships between
gold and the dollar, inflation,
bonds and the CRB index.
As bond traders, though, we are
most interested in the relationship
between gold and the bond
market. Looking at the past 20
years of data (Figure 1), we noticed
gold's reversals have led bond yield reversals. Looking
beyond the peaks and valleys and considering all the data,
does gold have a tendency to lead the bond market?
By Alex Saitta.
On-Balance
Volume by Stuart Evens
What do technicians look at in order to qualify the significance
of a trend? One key element is volume, in that high
volume in a trend indicates that large players may be involved.
The theory goes that large traders are better informed,
so the trend is likely to continue. How can you track
volume? Does a volume-based indicator help the analyst and
trader? Take a look.
One of the better-known technical
indicators to track volume
is the on-balance volume
(OBV).
By Stuart Evens.
Sizing A Futures
Trading Account
by Jay Kaeppel
While most traders start out working on a trading system,
they forget that the amount of starting capital is equally
important. Here are some guidelines to consider.
Novice traders focus their attention
on developing a system for
entering and exiting the markets.
In fact, an entire industry has
been spawned to facilitate trading
system development. The
age-old quest for the Holy Grail
fuels the simplistic attitude
among new traders that if their
timing is good enough, everything
will work out.
By Jay Kaeppel.
Smart Money by Scott Brown
Should you develop a personal trading system, one that
reflects your own personality?
A belief persists among investors
that a select group of traders
have the inside edge. Some indicators,
such as The Commitment
Of Traders Report, try to
track the activities of these traders.
Some recent research may
shed light on the composition
of this group, as well as the
techniques that the Market
Wizards use to consistently
beat the market.
By Scott Brown, PhD.
The Endpoint Fast Fourier Transform System
Last time, we explored the Fourier transform, a
mathematical technique for analyzing data to determine
cyclical component. This time, we use the fast
Fourier transform as a trend determinant for a model
for trading the Standard & Poor's 500.
In my previous article, "The Discrete
Fourier Transform Illusion,"
we demonstrated the misuses of
the Fourier transform mathematical
technique as applied to the
Standard & Poor's 500 index.
By Dennis Meyers, PhD.
The Euro's
True Colors by Walter Bressert and Doug Schaff
How do you analyze the Euro, a currency that sprang to life
with no price history?
How do you analyze a full-fledged
currency that came into
being overnight? Despite its
literal lack of price history,
millions of foreign currency
market participants—importers,
exporters, investors, risk
managers, not to mention others
— instantly had exposures,
long or short, the moment the
Euro took its first breath.
By Walter Bressert and Doug Schaff.
Using A Constant Investment
Size For Stock Trading Systems by Jack Schwager
The highest high to the lowest low in the price history of an
individual stock can vary tremendously, especially when
stock splits occur. This large range of price history can
distort the returns of a trading system. This noted analyst
explains the steps to adjusting stock data to avoid these
distortions.
At first glance, the issue of price
data appears to be far more
straightforward for stocks than
it is for futures.
By Jack Schwager.
LETTERS TO S&C
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? Have you
run across trading techniques, services or products that have proved useful? Tell us about
it. Without a source of new ideas and subjects coming from our readers, this magazine would
not exist.
By Technical Analysis, Inc.
Buy-And-Hold Comparisons
To Evaluate Stock Trading by Jack Schwager
Benchmark comparisons are a standard technique for the
performance of a trading system. One particular benchmark
is the buy-and-hold approach. This noted market analyst
looks at the steps to using it.
Just because a trading system
makes money in the stock market
doesn't mean it's a good
system. After all, it is possible
for a system to do well but still
fall short of the results that could
have been realized by a simple
buy-and-hold approach.
By Jack Schwager.
How Smooth Is Your Data Smoother? Traders use moving averages to remove random fluctuations from price data. Some moving averages work better than others. Take a look. In 1995, I wrote an article for STOCKS & COMMODITIES presenting some of the properties of three methods for removing random noise from financial time series. I discussed the lags between the turning point of a simple test data sequence and the turning points of three types of moving averages. I showed that for equal moving average periods, the three moving averages had markedly different lag characteristics.
By Patrick E. Lafferty.
Keeping Investing Simple
Doug Fabian Of
Fabian Investment
ResourcesFor mutual fund investors, one of the bestknown newsletters is Fabian
Investment Resources, previously known as Telephone Switch Newsletter. It
was begun by financial planner Dick Fabian, whose 1976 book, How To Be
Your Own Investment Counselor, triggered enough response for him to start
the newsletter the following year. Since then, the newsletter has prospered,
with Fabian's son, Doug, later picking up the reins and expanding its
horizons.
By Thom Hartle.
Pseudo Securities For
Technical Analysts
As you develop your analytical skills, you probably pick a
favorite market to study. So depending on the market, you
could come to different conclusions about the value of different
techniques of analysis. With that in mind, what if you used
artificial data with distinct properties as a basis for learning
the attributes of technical methods? In this, the first of a threepart
series, we explore the notion of using pseudo securities.
By Charles E. Miller.
Studying Risk
Behavior
Taking risk and taking losses are two different parts of
trading. Here's how to manage the emotional side of risktaking.
by Ari Kiev, M.D.
If you think about it, the markets
are a natural laboratory for studying
risktaking behavior, especially
decisionmaking in a volatile,
unpredictable, and uncertain
environment. It is the given
task of the trader to reduce risk
by identifying patterns in sectors,
companies in specific as
well as the marketplace in general.
By Ari Kiev, M.D.
The Euro's
Weekly Cycles
As a followup to last month's introduction to the newborn
European currency, here's what may happen to the Euro.
n January 4, 1999, the 40odd
years of planning and 10 years of
political and economic work paid
off as the Euro began trading in
a calm, orderly manner. But
what's the bottom line? How
will improved efficiencies from
a single currency affect Europe's
competitiveness? When will the
Euro's status as a reserve currency
begin to shift demand
away from US dollars?
The brandnew European Central Bank (ECB) is determined
to establish its credibility.
By Walter Bressert and Doug Schaff.
In the May 1998 issue of STOCKS & COMMODITIES, a Traders'
Tip provided MetaStock formulas for calculating support
and resistance levels and the WRO and WSO support and
resistance oscillators. The Traders' Tip was based on my
article, "Automated Support And Resistance," also in that
issue. Since then, I've received many E-mail messages from
STOCKS & COMMODITIES readers about it.
"How Smooth Is Your Data Smoother?" by Patrick E. Lafferty
in this issue reviews different types of moving averages,
including a sine-weighted moving average.
By Technical Analysis, Inc.
ELECTRONIC DAYTRADING
Editor,
As a long-time subscriber to your magazine,
I would like to ask why I haven't
seen any articles on electronic or online
trading. That being the case, could you
recommend some books or other sources
of information so that I can get a better
understanding of this new means of
trading stocks?
ROBERT CAMPBELL, via E-mail
In the May 1999 STOCKS & COMMODITIES,
we presented an interview with
David Nassar, author of How To Get
Started In Electronic Day Trading. The
other recent article was Mark Conway's
"Daytrading Stocks" in our August 1998
issue.—Editor
By Technical Analysis, Inc.
Yield Spread
Tunnels
Fixed income investors have an array of instruments in which
to invest. They can choose from an assortment of maturities as
well as credit quality. Here's a simple technique with which to
identify opportunities in the fixed-income market.
One common technique for assisting
fixed-income investors and traders in their decision making is the analysis
of yield spreads. A yield spread is
the difference in yield to maturity
(or that discount rate which equates
the present value of a bond to its
market value) between two bonds.
By Lorne W. Rae.
A System For Trading Fidelity Select Funds by Jay Kaeppel
The key techniques for trading stocks, options, and
futures can also be applied successfully to mutual
funds. Here's a systematic approach to mutual fund
trading.
Several keys to investment and
trading success are universal;
these keys apply to stock, futures,
and options trading, and
they also apply to trading mutual
funds. The first key is to
identify opportunities with
above-average profit potential.
The second is to determine how
best to take advantage of those
opportunities without taking on too much risk.
By Jay Kaeppel.
CorrelationAmong Stocks by Michael P. Turner
If you are trading stocks, you may find opportunities by
tracking the correlation between them. This can lead to
different strategies such as trading one company off of
another's news, spread trading, and sector trading. The
techniques described here were adapted from the book Day
Trading Into The Millennium, available from https://
www.tradersresource.com.
In today's financial markets, a relationship,
or correlation, exists
among all securities.
By Michael P. Turner.
By John A. Sarkett.
Identifying Crucial Support
And Resistance Levels
One tenet of technical analysis is the concept of support and
resistance. In it, markets stop declining, thereby establishing
a support level. A resistance level is set when a rally completes
its rise. Some support and resistance levels may be
more important than others. Here's a way to determine the
key levels.
A look at market movement tells
us that price fluctuates between
a level of support and a level of
resistance. Recognizing key support
and resistance levels can
improve our ability to enter, exit,
and manage our trades.
By Ned Gandevani, PhD.
Inherent Return In
Futures Markets
There has been a long-running controversy about the source
of returns to futures market investors.
By Charles R. Lightner.
From The Pit To The PC
Lewis J. Borsellino
The current, never-before-seen bull market in stocks has led to tremendous
growth in trading the Standard & Poor's 500 futures pits. One top S&P trader,
Lewis Borsellino, has been a runner, a clerk, a broker, an independent trader,
and now, a fund manager. Recently, Borsellino wrote about his life and time
in the pits in The Day Trader: From The Pit To The PC. STOCKS &
COMMODITIES Editor Thom Hartle interviewed Borsellino on April 21, 1999,
asking him about, among other things, his strengths, his mistakes, the future
of futures, and more.
By Thom Hartle.
Momentum
Trend-following methods and indicators have drawbacks:
One, they indicate a change in trend after the fact, thereby
missing a significant portion of the initial move. Two, markets
spend a lot of time not in trends, but in trading ranges —
and using trend-following methods with prices in trading
ranges can result in whipsaw losses. To avoid these pitfalls,
momentum indicators are used to forewarn of a change in
trend and the reversal of price at support and resistance
levels within a trading range.
By Stuart Evens.
Pseudo Securities For
Technical Analysts - Part 2
Last time, we examined the idea of using pseudo securities,
based on artificial data with known properties, to map the
characteristics of various indicators. We then applied this
concept to the time domain of security analysis. In this, the
second of a three-part series, we explore the actual technique
used to generate pseudo security data.
When working with pseudo securities,
as with anything else new
on the computer, it is generally
common sense not to experiment
within your working application.
By Charles E. Miller.
ELECTRONIC DAYTRADING
Considering the increased interest in
daytrading and our interview with David
Nassar in the May 1999 STOCKS &
COMMODITIES, we thought that some
clarification of common terms used in
electronic direct access trading (EDAT)
might be helpful.
Archipelago: Also called Terra Nova,
this electronic communications network
(ECN) has the symbol of TNTO on the
Level II screen.
By Technical Analysis, Inc.
WYCKOFF METHOD USEFUL
Editor,
I recently finished reading your wonderful
book, Charting The Stock Market:
The Wyckoff Method, and am send-ing
this letter to thank you for publishing
it and for making it available at a
very reasonable cost. Economy isn't
everything, but in this arena, spending
hundreds of dollars for books and products,
replete with appeals to human greed
and promises of ease of gain, is not
uncommon.
By Technical Analysis, Inc.
This month, we begin a new section
called Websites For Traders, describing
Websites of possible interest to traders,
technical analysts, and investors.
Since this magazine's focus is technical
analysis, we'll begin by discussing some
Websites that offer charting.
ASK RESEARCH
www.askresearch.com
Ask Research is a free service providing historical
and real-time market data and charts. Select
daily or intraday charts, and select your preferred
settings for charts and indicator parameters.
By Technical Analysis, Inc.
IBM, Cubed
Here's a look at what's involved in developing a
trend-following indicator for trading IBM.
In a previous article, I showed
how the application of a curve
generatedbyathird-degreepoly-nomial
could be used to develop
a system to buy and sell British
pound (BP) futures. This time,
we will use a variation of that cubed system to create a system to trade IBM.
IBM, one of the premier computer corporations in
the world, is a major factor in the movement of the
Dow Jones and Standard & Poor's 500 indices.
By Dennis Meyers, PhD.
A Guide To Conquering The Trading Markets - Kevin Haggerty
Kevin Haggerty's career on Wall Street covers nearly 25 years and numerous
responsibilities ranging from senior vice president and manager of equity
trading at Fidelity Capital Markets to serving as a managing director of the
Chicago Board Options Exchange. Now he's teamed up with Mark Boucher
and Larry Connors, some other noted names in the business that STOCKS &
COMMODITIES readers may recognize, to cofound a Website for traders called
TRADEHARD.COM.
By Thom Hartle.
Momentum And Relative
Strength Index
Last month, we examined the theory of price momentum. This
time, we'll look at two common and popular indicators based
on this theory, and how they can be used to enter and exit a
market.
""Momentum oscillator" is a generic
term used to refer to many different
indicators, two of which
are the relative strength index
(RSI) and momentum indicators.
By Stuart Evens.
COMPLEX TOP
The complex top is a broad classification
of somewhat irregular patterns that
do not fit into any one of the other
pattern definitions. One complex top
pattern, the complex head-and-shoulders
top, is one of the more symmetrical
formations that fall into this group. The
complex variety of head-and-shoulders
tops consists of different numbers and
combinations of shoulders and heads,
rather than just one head and one each of
left and right shoulders, as in the standard
variety.
By Technical Analysis, Inc.
Pseudo Securities For
Technical Analysts
Part 3
The first two parts of this three-part series examined the
theory, generation technique, and time series application of
rectilinear pseudo securities. In this, the conclusion, the same
theory is applied to the frequency domain of the market using
sinusoidal pseudo securities to produce a method for their
construction. Whereas the time domain was used to investigate
the linear relationships between market data and time, the
frequency domain will enable us to identify and study cyclical,
nonlinear relationships in security price movement.
By Charles E. Miller.
System Optimization And
Money Management
Most traders focus on optimizing the
trading system rules and
ignore money management rules until after
the system rules
have been established. Here's why you should
test both sets
of rules simultaneously.
Modern charting and analysis software
for traders is equipped with
the ability to optimize inputs for
a trading system. To optimize
inputs, first, a system must be
run for each combination of input
values within the set limits
and with a given setup.
By L. Zamansky, Ph.D., and M. Stolz.
The Night/Daymares
Of Traders
Your mind doesn't shut down when you go to sleep. Sometimes,
the trading from the daytime can stay with you into the
dreamtime. Here are ways to cope with trading nightmares.
If trading is a high-stakes game
of skill, psychology, and chance
played on a multidimensional
board, then none of the dimensions
can be ignored. Yet one
influential dimension is consistently
overlooked because it is
assumed that it is under control
or has little effect. The dimension in question? Our dream world.
By Adrienne Laris Toghraie.
TRACKING COMMODITY PORTFOLIO
Editor,
Is there a Website I can use to track my
portfolio of commodities and options?
Currently, I use Yahoo!, but it only
covers the Chicago Board of Trade and
doesn't provide quotes from NYMEX
and other exchanges. Perhaps this topic
could be the subject of a short article.
TIM DENKER, via E-mail
Thanks for writing. Last month, we
launched a new section called "Websites
for Traders," where we describe
Websites with features that traders
would find of interest. We'll keep an eye
out for a Website that offers commodity
and options portfolio tracking.
By Technical Analysis, Inc.
Value At Risk And
Technical Analysis
This method uses market volatility and the concept of value
at risk to help determine meaningful stop-loss prices and
position limits for trading securities.
Many traders and investors apply
security analysis techniques, either
technical or fundamental, to
take positions using mechanical
buy and sell signals generated
by their systems. In developing
their systems, time is spent on
developing the entry signals and,
to a lesser extent, the exit signals.
By Luis Ballesca-Loyo.
YAHOO! FINANCE https://quote.yahoo.com
Yahoo!, a leading Website directory, also offers
a site-within-a-site at https://quote.yahoo.com for
quotes, charts, and financial information. Here,
you can check delayed quotes, view basic charts,
and access a range of news and fundamental
data. You can perform some basic fundamental
analysis on stocks and mutual funds. You can
research equities by industries. You can even
access data on foreign markets. A well-rounded
site, it also provides information on consumer
products such as mortgage loans and auto loans.
By Technical Analysis, Inc.
What Market Timing Is —
And Isn't
Market timing is supposed to be great at reducing your risk
while letting you profit in the bull moves, but is it all it's
cracked up to be? This market timer discusses the pros and
cons.
Market timing—and market timers
— are often treated in the
media as barely a step above
snake-oil salesmen. It's easy to
become defensive in response.
But confession is good for the
soul. So here's an insider's look
at what timing is—and isn't.
I could claim that market timing
has a big impact on long-term
returns.
By Paul A. Merriman.
Anxiety Cure
Here are some tips on not letting those feelings of anxiety
affect your trading.
""Hope is not a strategy; it's a
simple emotion," a retired army
general remarked. He was talking
about a war, but his comment
reminded me of trading. I
remembered trading situations
when hope was the only strategy
I had.
That could be said about almost
any emotion and trading.
Greed is not a strategy; it's a
simple emotion. Fear is not a strategy; it's a simple emotion.
Sometimes, unfortunately, fear, or greed, or hope, or determination
does become a trader's basic strategy.
By Ruth Barrons Roosevelt.
Combining Technical And
Fundamental Analyses
The two forms of analysis approach market forecasting in
radically different styles. Can they be combined?
Few topics generate as much
heated discussion as the time-honored
debate of technical vs.
fundamental analysis. The two
schools do, in fact, offer radically
different approaches to
market forecasting; fundamental
analysis is concerned with
identifying the relevant variables
underlying price action,
while technical analysis attempts
to extract tradable information from price action itself.
By Mark C. Snead, PhD.
Exploiting Positions
With Money Management
Here's a trading technique for stops, including money
management guidelines.
ven in a bull market, there is a
feeling of triumph when a trade
goes our way. When this happens,
the novice trader feels
that getting the trade right is
enough in itself and that profits
will automatically follow. He
is invariably disappointed
when profits turn out to be smaller than expected, and
often, he will redirect his attention to derivative
markets to try to leverage winning trades into larger
profits.
By Daryl Guppy.
Following The Road Map Of The Market - Moe Ansari Of
Compak Trading
Discipline and determination are key to succeeding as a trader, or anything
else, for that matter. Moe Ansari of Compak Trading started off his college
years as an architecture major before he discovered his true calling in the
financial markets, only to be told he couldn't make it as a broker. He not only
proved that prediction wrong, he proved it very wrong.
By Bruce R. Faber.
Multiple-Indicator Techniques
For Index Funds
Traders expect uncertainty in the markets; it comes with the
territory of trading. But with the Standard & Poor's 500 hitting
new highs after a gut-wrenching decline, is there more uncertainty
today? Here's a set of multiple-indicator procedures for
trading an index fund, complete with historical examples.
We have all heard market experts
advise us to be long-term
investors. However, if you began
investing in 1973 or 1929,
could you have held on long
enough to earn a profit?
By Andrew Abraham.
Stochastics
As originally introduced by George Lane, the classic stochastic
oscillator is not a normalized relative strength indicator,
like most other momentum oscillators. However, it
does use closing price in its calculation, but in a way slightly
different from other oscillators. Here's a refresher for the
veteran traders and an introduction for the novices.
The stochastics oscillator was
originally introduced by George
C. Lane in STOCKS & COMMODITIES
in 1984. Since then,
it has become a popular indicator,
included in most technical
analysis software programs.
By Stuart Evens.
This month in Traders' Tips we take a look at stochastics as
defined in this issue's article "Stochastics" by Stuart Evens. The
calculation of the %K line, as defined in the article, is identical
to the way in which it is calculated in EasyLanguage. The %D
line, though, differs slightly. With this in mind, I have presented
the calculation for the %K and %D, using both the regular and
slow calculations. In addition, I have included two EasyLanguage
indicators, one that plots the regular version of the pair and one
that plots the slow version of the pair.
By Technical Analysis, Inc.
The Dead
Cat Bounce
If you trade stocks long enough, you might have an event take
your stock down 25% to 70% in a single session. Then the
situation gets grim. Here's a review of the dead cat bounce
chart pattern and a strategy to minimize any additional
losses.
Warren was a novice investor
who'd never suffered some of
the ups and downs of a volatile
market. He called me shortly
after the market closed one day,
and he was so excited, it took
me a moment to recognize his
voice: "Oxford just went from
69 to 26.
By Thomas Bulkowski.
CHARTS & GRAPHICS
Editor,
I read and enjoy your magazine each
month with great enthusiasm. I have
learned a lot from it and will continue to
do so. There is nothing else that compares.
My complaint is that the size of the
charts is way too small. This is technical
information with a lot of detail. Can you
make the charts and text larger? I'll bet
you'll get many compliments.
JOE GNANDT, via E-mail
Our intent is certainly to make Technical
Analysis of STOCKS & COMMODITIES,
The Traders' Magazine, as easy to
read as possible.
By Technical Analysis, Inc.
IQC.COM - www.iqc.com
IQC.com is a data source for the technically
oriented investor. IQC Corp. offers free stock
charts, quotes, stock scans, and market information.
The Website is straightforwardly laid out
and easy to navigate.
The homepage gives you today's index data
and a five-minute chart of the DJIA, with news
headlines below. View a market summary with
charts of indices, or enter a symbol to display a
quote or chart.
By Technical Analysis, Inc.
Gann Swings And Intraday Trading
Swing trading is one of the oldest technical methods in
technical trading literature. Even though it's little used these
days, this classic technique is hardly outmoded and can be
useful in trading today's volatile stock market.
To some, today's overheated
stock market must seem like
the land o' opportunity: just
step right up and jump on board
the train to make a profit. Unfortunately,
some days the
market looks more like a train
wreck than a weekend trip to
your favorite resort.
By Thom Hartle.
Getting Started With Options
Rather than shying away from the complexity of options, stick
with some simple basics in exploiting them.
You can start paper-trading options
despite their daunting
reputation for complexity. If you
succeed on paper, you'll have
taken the first step to extracting
profits from the real market. It's
true that there are many kinds of
options, and options terminology
is like a foreign language,
but professional traders use options
for a good reason. We'll
tell you why.
But first, yes, you can lose 100% of your investment.
By Joe Demkovich and Eugene Theriot.
How The Pros Use Average
Directional Index
Here's how technicians Charles LeBeau, Paul Rabbitt, and
Linda Bradford Raschke integrate the average directional
index into their trading plans.
How would you like to look over the shoulders of
professional traders using one of your favorite
indicators? Here's your chance. I spoke with
three well-known traders who put their own
money at risk daily. I asked them to show me
what they do with the average directional index
(ADX), one of the longest-lived and most popular
trend indicators around.
By Barbara Star, PhD.
On The Opening Bell - David Vomund Of AIQ
David Vomund of AIQ Systems wears a few hats, chief of which is his positions
as chief analyst of artificial intelligence–based charting software developer
AIQ Systems and the editor of AIQ's newsletter, The Opening Bell. Not only
that, Vomund is also president of Legarza Vomund Investment Management,
a registered investment advisory firm where he manages aggressive blue-chip
portfolios.
By John Sweeney.
This month in Traders' Tips we look at the MACD of the
relative strength (MACD RS) between two instruments. This
indicator is fairly easy to recreate in TradeStation's
PowerEditor using the built-in MACD function.
In the EasyLanguage for this indicator, relative strength is
calculated first. Once the relative strength value has been
obtained, then the MACD function is used to calculate the
differential line for Plot1. Both the XAverage and the MACD
functions are used in Plot2 for the calculation of the signal
line.
By Technical Analysis, Inc.
he Volatility Stop System
Here's a step-by-step through the development of a
robust trading system for capturing major market
moves.
Volatility systems have a long
and honored history in technical
trading. Here, I'll show you
a simple, robust version you
can use on a weekly basis. I
include code in a sidebar and
show the results of optimizing
the system for the Dow Jones Industrial Average
(DJIA), some stocks, and some mutual funds. The
results are good across the board.
The most robust systems adapt themselves to the
market or security being traded.
By Mark Vakkur, M.D.
Trading The MACD
You can trade Gerald Appel's moving average convergence/
divergence profitably in relatively flat markets. Here's how.
The moving average convergence/
divergence (MACD) is a
momentum oscillator developed
by Gerald Appel in the
early 1970s. For this oscillator,
momentum implies that
fluctuations in prices are reflected
in the MACD; if there is
a sudden increase in price, the
MACD will move upward. It
fluctuates above and below a
zero line—which is why it is known as an oscillator.
By Jayanthi Gopalakrishnan.
IDENTIFYING SUPPORT
& RESISTANCE LEVELS
Editor,
Bravo! I found Ned Gandevani's article
in the July 1999 STOCKS & COMMODITIES,
"Identifying Crucial Support And
Resistance Levels," the true remedy for
my quest. As an S&P day trader, I've
been in search of a solid method to
identify support and resistance levels in
the S&P market. I couldn't agree more
with Gandevani's statement that none
of the old and linear techniques work in
the S&P market. The author's simple
and creative concept offers a great practical
tool in locating crucial support/
resistance levels or common numbers.
By Technical Analysis, Inc.
QUOTE.COM'S FAST QUOTE AND LIVE! CHARTS - https://fast.quote.com
Quote.com offers a range of free and paid
charting services at its site. In the March 1999
STOCKS & COMMODITIES, we reviewed
QCharts, the Internet-delivered real-time quote
and charting service from Quote.com. But
Quote.com offers packages for every level of
trader, from free to $99.95 a month for the real-time
QCharts service.
By Technical Analysis, Inc.
By David R. Steckler.
By Steve Helme.
By J. Demkovich and E. Theriot.
By John Sweeney and Bruce Faber.
Letters to S&C
Regression for forecasting, exit strategies and getting started as a trader are some of the letter topics in this month's issue.
By Technical Analysis, Inc.
By Technical Analysis, Inc.
Is it possible to profitably trade a gap opening from the previous close? Here's one trader's test of that idea using Dow Jones Industrial Average (DJIA) stocks as the subjects. Profitably buying an opening dip or selling an opening
pop, depending on the size of the move, is possible,
but it's not easy money. I systematically tested taking a position in the morning following a gap at the open and unwinding the position at the close of the same day, regardless of profitability.
By Stephane Reverre.
By Benjamin L. Cotton.
Coding Candlesticks by Victor Likhovidov
Japanese candlestick charting is a popular method with which to visualize market price dynamics. Usually, candlestick charting is used in concert with other indicators to gauge market activity, but as a quantitative approach, technical analysis would be best served with quantitative rules for reading candlestick charts. Here's a simple method by which to assign digital codes to candlesticks. You'll see that the codes agree with the basic principles of technical analysis and may be used to construct a class of new indicators.
By Victor Likhovidov.
By Technical Analysis, Inc.
By Brent Aston.
By Alex Saitta.
By Rudy Teseo.
By John Sweeney and Bruce Faber.
By Stuart Evens.
By Jayanthi Gopalakrishnan.
By K.D. Angle.
By Adrienne Laris Toghraie.
Letters to S&C
Four pages of letters to the editor relating to technical analysis and this magazine. This column is our means of communication with our readers.
Some of this month's letters are on the following topics: EXCEL CODE FOR TREND-FOLLOWING
METHOD, COSINE-WEIGHTED MOVING AVERAGE, and THE VAP INDICATOR.
By Technical Analysis, Inc.
By Stephane Reverre.
By Technical Analysis, Inc.
By Technical Analysis, Inc.
By Technical Analysis, Inc.
By Thom Hartle.
By Technical Analysis, Inc.
By Technical Analysis, Inc.
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