February 2003 Letters To The Editor
or return to February 2003 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
HOW RELIABLE ARE CANDLESTICKS?
Editor,
First, I want to compliment you on your excellent magazine.
Next, I would like to point out some faults in "How Reliable
Are Candlesticks?", which appeared in the November 2002 issue of STOCKS
& COMMODITIES.
In the article, author Giovanni Maiani uses definitions of candlestick
signals without validating how correct these signals are. Remember, just
because candle signals are in a software package, that does not necessarily
make them correct. For example, to qualify a pattern as a hammer, there
are four rules:
1. The color of the real body can be black or white.
2. A bullish long lower shadow that is at least twice the height of
the real body.
3. It should have no, or a very short, upper shadow.
4. The market must be in a downtrend.
Rules 1 and 2 are easy to quantify. But how was rule 3 defined for
the signal used in the article? (That is, what was the maximum length of
the upper shadow for this to be defined as a hammer?) Or how about rule
4? How was a downtrend defined for the tests the author conducted in the
article? A candle signal needs two criteria: The first is the shape of
the line, the second is the trend. Thus, if there is no downtrend, there
is no hammer - even if the shape of the line looks like a hammer.
The most serious error was basing the success of a candle signal
on what happened the next session. Whether one trades based on a candle
signal should be fully dependent on the risk/reward of the potential trade.
This means that one should have a stop and a price target before placing
a trade, and not just buy or sell because there is a candle signal. For
instance, a stop should be placed under the low of a hammer. Unless one
has a target that is a multiple of this risk, the hammer should not be
used as a buy signal.
At my seminars, I have a series of pivotal rules. One of the most
important is: Not every candle signal should be used to buy or sell. Always
first consider the risk/reward. And this article doesn't take this vital
risk/reward aspect into account. Indeed, there are times when a candle
signal should be ignored. The author's study was based on just blindly
buying or selling on every candle signal. Using a candle signal to trade
without considering the risk/reward is like, as the Japanese proverb states,
leaning a ladder against the clouds.
Steve Nison, CMT, President, Candlecharts.com
Thank you for sharing your comments and insight.
Note to readers: Steve Nison was a pioneer in bringing candlestick
charting to this country and is a foremost authority on candlestick charting.-Editor
EDGAR PETERS INTERVIEW
Editor,
Thanks for the informative and timely interview of Ed Peters in your
December 2002 issue. I'm a long-time fan of Peters' work and have read
and reread his books, Chaos And Order In The Capital Markets and
Fractal Market Analysis, many times over.
In the interview, Peters states that "...based on the relationship
between stocks and interest rates, and a couple of other things, stocks
are pretty severely undervalued..." I'm familiar with some approaches
to determining a stock's value in comparison with the prevailing return
on T-bonds; but I'm really interested in finding out about the "couple
of other things" that Peters refers to in the interview. Would it
be possible for Peters to give us some information on these other methods
he uses to determine stock values?
Pat Lafferty, via e-mail, Pearland, TX
Thanks for your letter. We have forwarded your message to Peters with
the hope that he will write an article about his methods.-Editor
TITANS OF TECHNICAL ANALYSIS
Editor,
I read with interest David Penn's article on the who's who of technical
analysis ("The Titans Of Technical Analysis," October 2002 S&C).
I would have included Perry Kaufman for his outstanding book, Commodity
Trading Systems And Methods (Wiley, 1978); however, it is Penn's article.
Penn credits John Bollinger with the invention of the Bollinger Band
method of channelized trend trading. However, the earliest description
of that methodology with which I am familiar appeared in a book by Chester
Keltner. Keltner was a grain analyst in Kansas City, active in the 1940s
through at least the late 1960s. His book How To Make Money In Commodities
described the channelized trend method in 1960. He suggested a 10-day moving
average for the base and the 10-day average trading range for the channel
volatility bounds.
In 1971, a customer of mine from P&S Trading brought in the Keltner
channel idea. We programmed it. We named it the Keltner channel method,
shortened later to the Keltner model. P&S used the model for their
customers. We optimized it and managed money with it from 1972 through
1988.
The Keltner model was never a secret. We publicized it and sold the
data created to a number of firms. A local Chicago firm, Essex Trading,
I believe, packaged the model and sold the software. I still occasionally
hear from traders who are using the Keltner model for daytrading.
John Bollinger did not invent the channelized model, that is, a moving
average base bounded by a volatility measure. So far as I know, it was
Chester Keltner in 1960 who described the process long before Bollinger
arrived.
Don Jones, via e-mail, Cisco Futures
dljones@cisco-futures.com
Thank you for sharing your comments, especially since we know you have
a long history in the markets. It is important to know history and its
contributors, because we build on the past. Regarding the channel method:
While Bollinger may have developed and popularized his own version of the
channel method, other channel methods also exist and indeed may have been
around a lot longer. Thanks for pointing this out. We published an article
on using Keltner channels in our December 1999 issue, available at our
website, Traders.com.
Note to readers: See Donald Jones' recent articles in S&C
on auction market theory in our June, July, and November 2002 issues.-Editor
THE FISHER TRANSFORM
Editor,
In the November 2002 STOCKS & COMMODITIES, John Ehlers presents
an indicator called the Fisher transform. He states that if you take the
10-day momentum of the transform and multiply it by 10, you can create
a major turning point indicator, which the article demonstrates.
My problem is this: Although Ehlers shows the code to create the
Fisher transform, the EasyLanguage code of normalized prices and 10 times
its rate of change are not shown. I attempted to recreate what was shown
in the article with the following code but it won't plot properly in TradeStation:
Inputs: Price((H+L)/2), Len(10);
Vars: MaxH(0), MinL(0), Fish(0), FishMom(0), FishMomAccel(0);
MaxH = Highest(Price,Len);
MinL = Lowest(Price,Len);
Value1 = 0.33*2*((Price-MinL)/(MaxH - MinL) - 0.5) + 0.67*Value1[1];
If Value1 > 0.99 then Value1 = 0.999;
If Value1 < -0.99 then Value1 = -0.999;
Fish = 0.5*Log((1+Value1)/(1-Value1)) + 0.5*Fish[1];
FishMom = Momentum(Fish,Len);
FishMomAccel = 10*FishMom;
{Plot1(Fish, "Fisher");}
Plot2(FishMomAccel, "Trigger");
If I want TradeStation to plot only the momentum of the transform by
itself, it will do so, but if I want it to plot both the transform and
the momentum of the transform together on the same chart, the momentum
of the transform becomes a flat line. I think that this is a scaling problem.
As long as you're going to print the article, it would be helpful to publish
all of the EasyLanguage code and not just part of it. It appears that when
one puts both the transform and the momentum of the transform on the same
chart, a scaling problem is created so that both of them won't plot correctly.
Can you please ask Ehlers specifically what he did to the Fisher
transform in EasyLanguage to duplicate what he showed on page 42 of the
November 2002 issue? Thank you for your assistance.
Scott Gibson, via e-mail
John Ehlers replies:
Thank you for studying the Fisher transform. I meant the momentum to
cross the original indicator briskly, and that is the only reason for the
times 10 multiplier. Rather than use TradeStation's built-in momentum function,
I meant that the one-day momentum of Fish is just its current value less
its value one bar ago. Thus, you can ignore the FishMom variable in your
code and replace it with the following:
FishMomAccel = 10*(Fish - Fish[1]);
This will enable you to plot both indicators on a graph.
The Fisher transform is important to establish nearly Gaussian probability
functions so that the calculation of the one-sigma or two-sigma standard
deviations have real meaning. A number of indicators use multiples of the
standard deviation for their operation. The disadvantage of the Fisher
transform is that the generating function must be normalized to range between
+1 and -1. I used a 10-bar price channel as an example in the article.
However, other indicators, such as the RSI and stochastic oscillator, also
have normalized ranges. Generally, the normalization ranges between the
limits of zero and 100. To use the Fisher transform on these indicators,
the translation is easy. In terms of EasyLanguage code, the translation
for RSI, for example, is:
NormRSI = 2*(RSI/100 - 0.5);
Since the original RSI ranges between zero and 100, the NormRSI will range
between -1 and +1. You then can take the Fisher transform of NormRSI.
I encourage all readers to experiment with the Fisher transform to find
the true standard deviation value.
PS: Some readers have had problems reproducing Figure 7 because they
used the built-in TradeStation function to compute the rate of change.
The following code, replacing the Trigger, yields the results of Figure
7:
Plot2(10*(Fish - Fish[1]));
This code plots 10 times the one-day rate of change of the variable
Fish.
ERRATA: HOT ZONES
Editor,
I started to read "Hot Zones" in the December 2002 S&C
with some anticipation, but found Figure 3 confusing. Hope you or the author
can clarify the following:
1. The open/close matrix in Figure 3 is described as "Columns
representing opening zones" and rows, the closing zones. Then the
text says, "Looking along the second row (since the market opened
in zone 2), the market...." If the columns represent opening zones,
shouldn't we be looking along column 2, not down row 2?
2. Why is there no data in row 6?
3. The Opening Zone portion of Figure 3 also has an unclear description
("The first line is the total number of key reversal up patterns"),
and the number of patterns (whole numbers) are shown to two decimal places.
Very confusing, but I now see what the table is trying to show.
I look forward to S&C every month, and offer these comments in
the interest of maintaining the high quality of your magazine. Keep up
the good work!
Bob Hansman, via e-mail
We regret some errors in the caption for Figure 3 are making it unclear.
It should have read, "Columns representing zones," not "Columns
representing opening zones." In addition, in the Opening Zone portion
of Figure 3, it should have read, "The first column is the total number
of key reversal up patterns," not "The first line is the total
number of key reversal up patterns."
Regarding the data in row 6, the reason you're looking along row 2 is
to determine which zone the market will close in.-Editor
THE STOCK MARKET, THE CALENDAR, AND YOU
Editor,
I enjoyed the article "The Stock Market, The Calendar, And You"
(December 2002 S&C). However, I believe that the period starting October
1, 2002, and ending December 31, 2003 (that is, the Presidential election
cycle), is 15 months, not 14 months, unless the number of months in a calendar
year has changed recently.
Jim Orr, via e-mail
RESULTS OF A SHORT STRATEGY?
Editor,
I have a question directed toward Jay Kaeppel, author of the recent
article "The Stock Market, The Calendar, And You" (December 2002
S&C). I would like to know if it would be possible to hear from him
on another iteration of the "+2" strategy.
Suppose the days when the seasonal index reading was a zero, you
were short the Otc with 2-to-1 leverage. A reading of 1 would indicate
a cash position. A reading of 2+ would be long with 2-to-1 leverage.
I would be interested in the results a short strategy would produce,
including whether the extra gains (if any) would be enough to outweigh
the extra commissions.
Rick Shoup
rick_shoup@msn.com
We have forwarded your letter to Jay Kaeppel at Essex Trading. Perhaps
that will entice him into writing a follow-up article!-Editor
BACK ISSUE SEARCH
Editor,
I read your magazine every month and really find it useful.
I am writing because I cannot find my issue from a few months ago.
In it there was an article that mentioned a link to a website where you
can type in a stock and it will tell you what stocks are statistically
correlated to that stock. If it would be possible for you to e-mail me
that link, I would be very grateful.
Dennis Young, via e-mail
Atlanta, GA
Readers wishing to look up past articles might try using the search
engine at our website, Traders.com.-Editor
MATRIX ANALYSIS?
Editor,
I have been reading your magazine for a few months now and have been
impressed to the point that I ordered a five-year subscription. Your magazine
has information that is useful for beginners and the most dedicated programmers.
Also, I like that you seem to have the lowdown on everybody offering services
in the industry. Your magazine is a strong part of my plan to make money
trading.
I have been reviewing numerous indicators, oscillators, price relationships,
and so on. I have found that it is easiest for me to classify things using
a numeric coding system and to place them in a matrix format. The problem
is, I do not know of any past work that has been done in this area. Could
you recommend any books or resources that I could look into to help me
refine my ideas? Any help you can provide is greatly appreciated.
David Hodge, via e-mail
I have not heard of any work that places indicators in a matrix format.
I recommend you go to the Traders.com Advantage portion of our website
at Traders.com for a list of indicators. In addition, here are two more
resources for a listing of indicators.-Editor
Achelis, Steven B. [1995]. Technical Analysis From
A To Z, Probus Publishing.
Colby, R.W., and T.A. Meyers [1988]. The Encyclopedia
Of Technical Market Indicators, Dow Jones-Irwin.
WAITING FOR THE FED
Editor,
In "Waiting For The Fed" in the August 2002 S&C, David
Penn discusses the system of Mark Boucher, which bought in 10/95 and sold
in 9/98. In the Letters to S&C column the following month, Penn discusses
the calculation in more detail, stating that the absolute value of the
year-over-year rate-of-change (ROC) of three-month Treasury bills had to
be less than 6%.
Using his data source, the numbers are:
Feb 1995 5.94
Mar 1995 5.91
and
Feb 1996 5.15
Mar 1996 4.96
This leads to an absolute ROC of:
16.5%
13.7%
which should have resulted in a sell. Has something been omitted
from the discussion?
Lawrence Kirsch, kirsch@brandeis.edu
Newton, MA
David Penn replies:
It appears you are right that something was left out of the discussion
- and, perhaps, out of Mark Boucher's analysis as well. Here are the buy/sell
signals I get since the 11/95 long signal. The entries represent: long/sell,
effective date, the year-over-year rate of change in three-month T-bill,
and the actual yields of the bills.
Long 11/95
Year-over-year ROC 1.3%
5.45 to 5.52
Sell 12/95
Year-over-year ROC 8.2%
5.76 to 5.29
Long 7/96
Year-over-year ROC 5.2%
5.59 to 5.3
Sell 8/96
Year-over-year ROC 6.8%
5.57 to 5.19
Long 9/96
Year-over-year ROC 3.5%
5.43 to 5.24
Sell 11/96
Year-over-year ROC 6.3%
5.52 to 5.17
Long 12/96
Year-over-year ROC 4.7%
5.29 to 5.04
Sell 9/98
Year-over-year ROC 6.7%
5.08 to 4.74
Long 8/99
Year-over-year ROC 3.4%
5.04 to 4.87
Sell 10/99
Year-over-year ROC 23%
4.07 to 5.02
Long 1/01
Year-over-year ROC 3.8%
5.5 to 5.29
Sell 2/01
Year-over-year ROC 12.6%
5.73 to 5.01
According to the model, we would still be out of the S&P 500 as
of 11/02.
Thanks for reading Working Money and STOCKS & COMMODITIES
- and for spotting what I agree appears to be an oversight in Boucher's
otherwise compelling timing model.
WRITING GUIDELINES
I'm a teacher at National University Lvivska Politechnika in Ukraine.
Can I publish my article in your magazine?
Ihor Vysotskyy, via e-mail
Thank you for your interest in submitting an article to STOCKS &
COMMODITIES. You can find our author guidelines at our website, Traders.com,
in the editorial department area. The guidelines describe what we look
for in an article and how to go about submitting one.-Editor
ERRATA: McSPREAD
Editor,
We just received the November 2002 S&C. Our software program,
McSpread, was mentioned on page 144, but it has a wrong picture with it.
Track ECN has nothing to do with McSpread.
Ron Schelling, www.2hedge.com
We regret that the pictures were displayed out of order on this page
of our Trade News & Products column. The correct picture appears in
this month's Trade News column.-Editor
ERRATA: TRUTH ABOUT TRENDLINES
Editor,
I have a correction to my article "The Truth About Trendlines"
as it was published in the October 2002 S&C. On page 41, Figure 3,
the last line should show "True" for both table entries. The
words are missing.
Tom Bulkowski
We regret this omission in the table. Thanks for pointing it out.-Editor
Back to February 2003 Contents
