TRADING THE TREND
Editor,
In his September 1998 article ("Trading the trend"), Andrew Abraham states in the second paragraph that "the calculation uses a 21-period weighted average of the true range, giving higher weight to the true range of the most recent bar." What does he mean by the second part of that sentence?
The idea of qualifying trends in this manner appeals greatly to me, even though it may take a considerable effort to keep track of all the mathematics on a daily basis for perhaps two contracts each of 40 commodities. Being able to use a volatility indicator in a charting program would certainly help, but only if the weighting suggested by Abraham is available in the volatility function.
John Kocher, via E-mail
Cleveland, OH
A weighted moving average multiples a weighting factor by each close and then divides this product by the sum of the factors. For example, here's the calculation for a three-period weighted moving average for three days' closing prices, where today = 30, previous day = 29, and two days ago = 28:
for the three-period weighted moving average. Most technical analysis software makes use of weighted moving averages and you will usually find an explanation for it in the manual.-- Editor
RESISTANCE AND SUPPORT
Editor,
As a long-term subscriber to your interesting magazine, I must tell you that the article by Dennis Tilley in September 1998 ("Moving averages with resistance and support") is one of the best I have read.
The method has the virtue of simplicity and seems to work well when applied to stocks on the London exchange. It appears there could be some ambiguity in determining the resistance and support points, but on the whole, this difficulty is largely self-correcting.
On another matter, I wonder if you could persuade one of your contributors to describe how chaos theory can be used in day-to-day technical analysis. I have read several books on chaos theory, and none, as far as I am aware, explains its use in any detail. I am told that professional analysts are now using chaos theory with varying degrees of success, and I would suggest that the rest of us would appreciate information about these latest techniques.
Percy Lamb
Essex, England
Perhaps someone reading this will take you up on your invitation to discuss recent developments in chaos theory and trading in the form of an article submission. In the meantime, here's a partial list of articles we've published on the subject of chaos theory:
Chaos Theory and Market Behavior
(November 1989, Vol. 7) Order masquerading as disorder -- a sweeping revolution in the sciences is bringing to light the patterns underlying random behavior. By Bernd Anders
Nonlinearity, Chaos Theory and the DJIA
(September 1991, Vol. 9) Here's a fresh look on using nonlinear systems and chaos theory to understand the markets. By Victor E. Krynicki, Ph.D.
Chaos Theory and Neural Network Analysis
(June 1992, Vol. 10) Do markets have memory? In this new theory by Edgar Peters, an offshoot of chaos theory, the author explains that markets can be regarded as nonlinear dynamic systems, and neural networks can be used to analyze and gauge behavioral patterns in price change data useful in prediction. By John Kean
INTERVIEW
Technical Analysis As A Statistical Process: Asoka Selvarajah Of Rabobank International
(April 1998, Vol. 16) According to Asoka Selvarajah, markets do make sense ultimately, but not in a way that most people imagine. To understand the markets, according to Selvarajah, requires a dash of Pythagorean theory, a smidgen of Newtonian physics, and even some chaos. Selvarajah, who works for Rabobank International, one of the largest banks in the world and one of the few European banks in the world with a triple-A rating, was interviewed by STOCKS & COMMODITIES Editor Thom Hartle via E-mail over a period of several weeks in January 1998, discussing systematic trading and development as well as trading overseas markets. By Thom Hartle
TRADING SOFTWARE AND SYSTEM REVIEWS
Editor,
I subscribe to S&C and received your 1998 Bonus Issue. I want to start trading stocks with a software system. Do you know of any resources that evaluate trading software for technical analysis of stocks? If yes, can you please tell me how I can get more information? If no, can you recommend any software system or pass along any good comments on any of them?
Bobby Lee, via E-mail
We publish reviews of technical analysis software every month in STOCKS & COMMODITIES.-- Editor
READERS' CHOICE AWARDS: A POPULARITY CONTEST?
Editor,
I just filled out and mailed off my copy of the Readers' Choice ballot, which came with my August issue. Clearly, the results of this reader poll will show what software is most popular, and perhaps which products have good marketing behind them, rather than show what software is most effective.
Don Morton, via E-mail
It is true that the August poll, from which the results will be tabulated and published as our Readers' Choice Awards in our 1999 Bonus Issue, will naturally reflect to some degree the most popular products and services. But to some degree, those products and services have become as well known and popular as they are because they meet traders' needs. Moreover, a reader poll will reflect products and services that are more heavily marketed because readers can't vote for a product they have not heard of or don't know about. In any case, we always suggest that readers fully consider whether their unique needs may call for a lesser-known product, and to research as many products as they can before purchasing. The "honorable mention" category tends to include some of the lesser-known products that readers still find effective. -- Editor
STUDYING SPIDERS
Editor,
I've been a subscriber to your magazine for two years now, and I find it an excellent source of education in the study of technical analysis.
Currently, I am working on my thesis for the third level of the Chartered Market Technician program offered by the Market Technicians Association. I'm exploring the relationship between specific time-of-day trading activity and its effect on the longer-term trends of price, specifically on the stock market. I have been tracking Spiders (listed on AMEX and NASDAQ) in an attempt to uncover recognizable time/price relationship patterns in the S&P 500.
My question to you is this: Are you aware of any source that might be able to provide me with historical intraday data on SPIDERS? I am hoping to get data going back about five years, if possible. I would also be interested in purchasing any of your back issues that contain articles on the effect of time on price, again dealing with the stock market. If there are any books written on the subject that you could recommend, I'd love to hear about them as well. For instance, I believe that there was a study done on the relationship between the first and last hour of trading in the stock market that was published some time ago, but I haven't run across it yet.
Any information on the above that you could forward to me would be greatly appreciated.
Keith Richards, via E-mail
Please contact data vendors regarding information about intraday data on specific tradables. (Check the Advertising Index at the back of our magazine under "Data services.") Here, then, are some articles we've published on the topics of time and price:
Two Filtered Indicators
(December 1990, Vol. 8) By filtering two indicators, this author discovered the Friday tick indicator and the last hour/first hour indicator, and new predictive power. By Daniel E. Downing
Second Hour Index
(November 1990, Vol. 8) We all know that the last hour of the trading day can be ominous in futures trading, right? Technician Arthur Merrill, to whom a truism is never true 'til tested for himself, says that maybe we've been giving our attention to the wrong hour. By Arthur A. Merrill, C.M.T.
Time as a Trading Tool
(March 1991, Vol. 9) Most trading methodologies approach market activity from a price perspective. But while price is an important dimension of market activity, time and pattern can never be ignored. Traders have the best opportunity to make a profitable trading decision when all three dimensions of market activity indicate that change is likely. This article looks at the first dimension, time. By Robert Miner
Price as a Trading Tool
(April 1991, Vol. 9) Time, price and pattern are three all-important dimensions of market activity. Traders have the best opportunity to make a profitable trading decision when all three dimensions of market activity indicate that change is likely. This article looks at the second dimension, price. By Robert Miner
The Time Price Oscillator
(September 1995, Vol. 13) Technical indicators, and oscillators in particular, measure the behavior of price relative to time. For example, the rate of change oscillator calculates the percentage change in price over a set period. That said, now consider an indicator that reverses the roles of price to time and measures the passage of time relative to price. This article details such an indicator, presenting numerous applications. By Tushar S. Chande
Readers interested in learning about how to receive the designation for Certified Market Technician (CMT) can contact the Market Technicians Association at MTA, One World Trade Center, Suite 4447, New York, NY 10048, E-mail: ShelleyMTA@aol.com, Internet: www.mta-usa.org.-- Editor
TAX CONSEQUENCES OF INVESTING
Editor,
I purchased the June 1998 issue of your magazine for the first time and found it to be information packed and very informative. It certainly won't be the last issue.
One article I found most interesting was "Developing a trading system, part 1," but when I finished, it seemed that it left out one of the more important considerations in taking a profit: the federal income tax consequences one suffers when cashing in.
For example, the article stated that if I had used the seasonality indicator, I would have increased a $10,000 to $703,900, versus $372,300 for buy and hold. Yet, if I cash in at season's end, I make a profit. If I make a profit, I pay tax. If I pay tax, then I have less to invest next season. Not knowing the actual per year profits, nor the tax rate, I could not compute an exact number, but it would have to be substantial. Was this taken into account in the calculations? After all, with buy and hold, I pay no tax until I finally cash in.
I found a similar lack of tax consequences in virtually every article dealing with technical systems. Am I missing something, or is the expectation that I must do my own tax planning separately from considering the system?
Wayne Herbert, via E-mail Houston,TX
We do not take tax consequences into account because all our readers around the world face different tax situations, but consider applying the trading plan to your IRA, where capital gains tax would not be an issue. Of course, short positions are not permitted in an IRA.-- Editor
DRAWDOWN
Editor,
First, my thanks to you for a fine and very educational, helpful, and even entertaining magazine. I've learned a lot from reading it in the first year of my involvement with trading. I am not yet active in the markets, but hope to be soon, after a few points of confusion are smoothed out.
I have two immediate questions. The first: I am seeking a fairly detailed description of what constitutes drawdown. I understand that it is the decrease in equity of a trading account as a consequence of trading activity. But I am apparently overlooking something as I can never reconcile my notion of the drawdown of a set of trades with the examples I find in your articles or in several other books. Commissions, fees, possibly slippage, and answers to margin calls occur to me as the main components of drawdown. Is this so? What am I missing? I really feel I need to be able to accurately calculate a thing to be able to say I understand it. And this is important to understand!
Second: I am looking for a source of cash price data for commodities. I find very few sources for this, mostly Canadian exchanges, but I am looking for US price data. Any suggestions? Would your readers have suggestions?
Thanks and keep up the good work!
Bob Ward, via E-mail
Drawdown is the negative equity performance of your trading. It can be the difference between your entry and exit prices for losing trades, or it can be the difference between your entry price and the worst price level experienced while in any trade, either on an intraday basis or on a closing basis. Most important, there is more to a tradng system than just profits: How much pain did you have to live through? -- Editor
PSYCHOLOGICAL MATRICES
Editor,
I would appreciate knowing if any computer program has been developed based on the methods described in the article "From technical terms to technical tools" by Walter T. Downs, which appeared in your August 1998 STOCKS & COMMODITIES. Also, what existing indicators could be utilized best to measure the psychological factors addressed in the article?
Marty Grant, via E-mail
The author used TradeStation. The system code was provided in our Traders' Tips column in that issue.-- Editor
S&C INFO
Back issues:
Single back issues from the current year (subject to availability) are $8 prepaid. Prior years are available in book format (indexed and without ads) or in CD-ROM format. Currently, Technical Analysis of STOCKS & COMMODITIES Volumes 1 through 15 are available for purchase (see page 11 of this issue for ordering information).
