November 2003 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

CODE AND TRADERS' TIPS

Editor,

I read S&C every month. It's a good magazine with good content and presentation.

The only problem I run into is with the Traders' Tips section of your website. When you include the code for, say, TradeStation or MetaStock in an article, the problem is you don't post it to the Traders' Tips section at your website - the tip simply refers us back to the article.

Yet one of the advantages of the Traders' Tips section is that readers don't have to type in all the code with its strange syntax for their platform. If you don't put the code into the Traders' Tips section, your readers have to laboriously type it in and then debug it because syntax errors will always be there.

I would appreciate your posting the code given in articles and article sidebars to the Traders' Tips section at your website.
Jack Olson
via email

Code and formulas given in S&C articles are posted not in the Traders' Tips section of our website, but rather in the Subscribers' Area at our website:

https://technical.traders.com/sub/sublogin.asp

Subscribers can log into this area using your subscriber account number (found on your mailing label) and last name. From here, code can be copied and pasted into your computer program. Scroll down to view entries for past issues.

Code found in the Traders' Tips section is generally contributed by the program developers rather than our authors, and provides code for programs other than the one an article author may be working in.

Code from Traders' Tips is posted at our website in our Traders' Tips area, as well as at the program developers' websites. Current-issue Traders' Tips can be found at:

https://www.traders.com/Documentation/FEEDbk_docs/TradersTips/TradersTips.html

Past-issue Traders' Tips are found at:

https://www.traders.com/Documentation/FEEDbk_docs/Archive/Y-2003.html

Thank you for writing.-Editor

SYSTEM RESULTS AND EFFECT OF COMMISSIONS

Editor,

While I enjoy trading and like the technical aspects of it, I have to take serious issue with the system presented in the July 2003 issue to trade the CCI ("Trend Alert! With The CCI" by Martin Boot).

When I look at the numbers, it seems to me that leaving out commissions is a major mistake. In the second scenario, 7,500 trades - even with a small $30 round trip - results in $227,000 of commission costs alone. Add to that taxes (say 25% on net gains) and spread it out over eight years, and I figure the return to the account holder is about $33,000 per year. Strangely, this works out to about the same return if you bought a 5% Treasury bill and held it for the same eight years, both being net of tax returns.

I understand the intention of the article to show the effect of tweaking the use of the indicator, but what isn't made clear is the $890,000 account size necessary to obtain the "profit."

I guess this is a case that shows there are no get-rich-quick schemes in trading, and that trying to automate the trades results in average returns with high risk. This also assumes that the trader stuck with the system, even through drastic drawdowns, and didn't give up when the account went to $250k.
Norman Bruland, via email

Martin Boot replies:

I am afraid you missed the point. In the article, I come to the conclusion that one should not use CCI for a trading system. This conclusion has a solid foundation in the statistics reported in the article. One should use CCI as a leading indicator for major trend reversals. Applied that way, CCI will give you an edge, and properly applied, it will be quite profitable.

Thank you for your remarks.

ERRATA: DETECTING BREAKOUTS IN INTRADAY CHARTS AND DIVERGENCE METHODS

Editor,
Thank you for the great articles by Markos Katsanos in the April and September 2003 issues ("Detecting Breakouts" and "Detecting Breakouts In Intraday Charts"). I believe his finite volume elements indicator (FVE) is a good indicator.

I was wondering if you could publish a more detailed explanation on how he uses the divergence formulas? Which ones does he prefer?

I tried the FVE using the September 2003 formulas on the symbol T, which is AT&T. The results appear strange. In addition, I put the data into an Excel spreadsheet and verified the same "strange" results. I am attaching a spreadsheet to illustrate the problem [not shown].

Thank you for your help and again, thanks for the articles.
George Pitcher, via email

Markos Katsanos replies:

I have detected three errors in columns L, M, and O. That explains the strange results. I am attaching a spreadsheet with the correct formulas. [Editor's note: Readers will find this corrected spreadsheet posted at our website in the Subscribers' Area.]

Concerning the divergence systems, I introduced in my April 2003 S&C article, "Detecting Breakouts," the following four systems:

1. The linear regression method
2. The HH & HL method (Fve should make a higher high and a higher low while price is flat)
3. The Storz divergence index
4. The Bollinger Band divergence method.

Although I used the first one in my article for the Xmst system test, it has its limitations, since price and FVE are not directly comparable. Divergence can only be detected if Lrs(C) < 0 and Lrs(Fve) > 0.

The second system is more of a visual one, as it is notoriously difficult to program off-the-shelf technical analysis software to correctly spot HH or HLs.

I did not have any worthwhile hits with the divergence index method, so that leaves us with the Bollinger Band method.

This is the easiest to program, and I am including the MetaStock exploration code that I use. [Editor's note: Readers can find this code at the Subscribers' Area of our website.] Here is the MetaStock exploration:

PERIOD:= 22;
PERS:=40;
COEF:=.1;
INTRA:=Log(H)-Log(L);
VINTRA:=Stdev(INTRA,PERIOD);
INTER:=Log(Typical())-Log(Ref(Typical(),-1));
VINTER:=Stdev(INTER,PERIOD);
CUTOFF:=COEF*(VINTER+VINTRA)*C;
MF:=C-(H+L)/2+Typical()-Ref(Typical(),-1);
FVE:=Sum(If(MF>CUTOFF, +V, If(MF <-CUTOFF,
 -V,0)),PERIOD)/Mov(V,PERIOD,S)/PERIOD*100;
FVE12:=Sum( If( MF >CUTOFF, +V, If(MF <CUTOFF/100,
 -V, 0) ),12)/Mov(V,12,S)/12*100;
CBOL:= 1+((C- BBandBot(C ,PERS ,S ,2 ))/( BBandTop(C,
 PERS ,S ,2) -BBandBot(C ,PERS ,S ,2 )));
INDBOL:=1+((FVE- BBandBot(FVE ,PERS ,S ,2 ))/( BBandTop(FVE,
 PERS ,S ,2) -BBandBot(FVE ,PERS ,S ,2 )));
DIVERG1:=(INDBOL-CBOL)/cbol*100;
diverg:=Mov(diverg1,3,E);
MACDH:=MACD()-Mov(MACD(),9,E);
FVE>-15
 AND FVE<20
 AND diverg>30
 AND LinRegSlope(FVE,15)>.6
 AND LinRegSlope(FVE12,15)>0.5
 AND FVE12>Ref(FVE12,-1)
 AND MACDH>0

I introduced the condition that when MACD>its nine-day EMA to discard stocks that are still in downtrends and also to reduce the breakout time.

This is a profitable system, but my experience in trading it with real money, however, reminds me more of Las Vegas than investing or prudent speculation.

For example, a MetaStock exploration that I ran on August 14, 2003, produced the following result:

The big winners were SOI (up 306%), GGUY and GT (up 40%), and only one big loser, PTEN (down 40%). SOI was up more than 300% in five days, but before breaking out, it went from 1.2 to 0.9 (down 25%). If you had a stop-loss, you would have been stopped out before the breakout.

If you want to use this system, keep in mind the following:

1. It is not suitable for risk-adverse investors.
2. It works better with volatile and non-index component stocks (such as Biotech or other Nasdaq tech stocks). The usual hits are companies with problems (usually biotechs, electric utilities, or medical equipment). I used to get a lot of Internet or semiconductor stocks, but not any more, as they went up more than 60% since March.
3. Unless you have a crystal ball, you cannot time the exact reversal day, and it is very likely that the stock will go down before going up.


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