## Contents For DEC1990

• ### Beating The Market With An Expert Trading System by Jerry Felsen

ARTICLE SYNOPSIS ...Beating The Market With An Expert Trading System by Jerry Felsen A mathematically provable trading system (MPTS) can be defined as a trading method for which superior expected performance can be proved scientifically. I measure system performance by means of a risk-adjusted return--that is, the index of performance is a ratio of the expected return divided by the corresponding expected risk. To ""beat the market"" earning an above-average risk adjusted return (RAR) is the key. It's easier to beat the market with an MPTS than by methods that rely mainly on a good track record. The standard app...

• ### Clues To Market Direction With The S&P 500 Premium by Jean-Olivier Fraisse, CFA

ARTICLE SYNOPSIS ...Clues To Market Direction With The S&P 500 Premium by Jean-Olivier Fraisse, CFA Need a clue to short-term market direction? The premium between the Standard & Poor's 500 futures and the corresponding cash index may help, provided you understand how it is determined, what its theoretical (or fair) value is and how program traders use it. The S&P 500 index is based on the stock prices of 500 different companies with an aggregate market value of some 80% of the value of all stocks traded on the New York Stock Exchange. It is a capitalization weighted index; each component stock's price is multi...

• ### Combining Andrews With Elliott Wave High by Ron Jaenisch

ARTICLE SYNOPSIS ...Combining Andrews With Elliott Wave High by Ron Jaenisch The first concept that a student of the Elliott wave theory learns is about the five-wave structure of a move. The first concept that a student of the Andrews method learns is that prices make the median line about 80% of the time. The two concepts are compatible and they are also complementary. To draw an Andrews median line, do the following: 1. Find three consecutive pivots, sometimes referred to as turns or ends of Elliott waves. 2. Label the pivots A, B and C. 3. Draw a line between point B and C and label the midpoint of that ...

• ### Customer Option Activity by Arthur A. Merrill, C.M.T.

ARTICLE SYNOPSIS ...Customer Option Activity by Arthur A. Merrill, C.M.T. The Options Clearing Corporation issues a weekly report to subscribers that lists the totals of options bought and sold on all exchanges nationwide. The transactions are segregated by customer, market makers and by firm. Technical analyst Robert Nurock developed an index of professional activity based on the buying and selling of puts and calls. I've applied his idea to the customer area. If the public (customers) are optimistic and are buying calls, the calls are being supplied to them by smart money? the professionals. This should be a ...

• ### East Meets West: CandlePower Charting by Greg Morris

ARTICLE SYNOPSIS ...East Meets West: CandlePower Charting by Greg Morris Candlestick charting was introduced to me back in May 1988 at an annual Market Technicians Association meeting. The method, which originated in the Japanese rice futures market in the 1600s, received its share of attention in more than a few lectures, as numerous technical analysts from Japan were attending and speaking at the meeting. Another exciting topic presented at the meeting was Equivolume charting. Richard Arms, who wrote Volume Cycles in the Stock Market in 1983, was introducing his Equivolume charting software. Both the candlest...

• ### Find your optimal f by Ralph Vince

ARTICLE SYNOPSIS ...Find your optimal f by Ralph Vince As a computer programmer for Larry Williams, winner of the 1987 World Cup Championship of Futures Trading, I have had the opportunity to analyze many good trading systems. Even the best systems, however, suffer from an as-yet incomplete library of money management techniques. I felt a technique to select the optimal number of contracts to trade in an account needed to be designed. The value of such a system is determined by using the formula for mathematical expectation: (W?P)+[L (1 -P)]=ME Where: P = The probability of winning W = The amount you may win...

• ### Gaps by Thom Hartle and Melanie F. Bowman

ARTICLE SYNOPSIS ...Gaps by Thom Hartle and Melanie F. Bowman Occasionally, trading leaps over a range of prices to reach a new level, leaving a blank space in the price chart. If these spaces are wider than the usual 1/8- to 1/2-point difference in bids, they imply that significantly more is yet to come. When chart gaps are no wider than the usual difference between bids, on the other hand, they provide no information. Gaps appear most frequently in daily charts, where every day is a new opportunity to trade higher or lower than the previous day's high or low. A monthly chart, in contrast, offers a very narrow...

• ### Least-Squares Data Smoothing by Harold A. Kreamer

ARTICLE SYNOPSIS ...Least-Squares Data Smoothing by Harold A. Kreamer Superimposed on and often indistinguishable from daily market data trends are seemingly random fluctuations, known as noise. An analyst wants to remove as much noise from data as possible without degrading underlying valid trends. To remove noise from stock, commodity and index data trends as efficiently as possible, I use the least-squares method. Whereas a lengthy moving average that goes through a sharp peak or trough reduces the extreme value, the least squares method retains most of that value. Triangular and exponential methods purposel...

• ### Parameter Optimization by Roger Altman, Ph.D.

ARTICLE SYNOPSIS ...Parameter Optimization by Roger Altman, Ph.D. Optimizing the parameters of mechanical trading systems to improve performance is a common technique, but does such a procedure improve system profitability? Is there evidence that optimization will lead us to parameters that yield at least better than average performance? Any system has three components: The unit of price or time change--also known as gang size --within which price movements will be compared. In bar charts, for example, time is stipulated so that price is free to vary to any value. Daily, weekly and monthly bar charts are the mos...

• ### Perennial Mutual Funds: Staying With Winners by Palmer Wright, Ph.D.

ARTICLE SYNOPSIS ...Perennial Mutual Funds: Staying With Winners by Palmer Wright, Ph.D. In past issues of STOCKS & COMMODITIES, Fay Dworkin and Gary Zin have advocated selecting stock mutual funds on the basis of relative performance over periods of one to nine months. Zin rejected the additional use of five- r year performance because requiring funds to exceed a market index over the longer period did not improve his shorter-term momentum approach. Focusing on any five-year performance list is of limited value, whether the ranking is end-of-year or current. Such ""winners"" usually fall off the list within a ...

• ### SIDEBAR: CALCULATING PREMIUM FAIR VALUE

ARTICLE SYNOPSIS ...SIDEBAR: CALCULATING PREMIUM FAIR VALUE A risk-averse investor wants to invest in the stock market. How does he do it without risking loss? He can borrow funds, buy a portfolio of stocks equivalent to the S&P 500 index at the price of S and simultaneously sell a S&P futures contract at a price of F. He has achieved a hedged position that is totally riskless, any depreciation in stock prices being compensated by a decrease in the value of the futures he sold....

• ### SIDEBAR: COLE'S METHOD

ARTICLE SYNOPSIS ...SIDEBAR: COLE'S METHOD Roger Cole developed a technique to determine when insiders are alerting each other about which stock will move and to what price. The technique involves categorizing trading days by price patterns and matching these patterns with volume requirements to look for up or down signals. According to Cole's work, every trading day for every stock must fall into one of four categories: Rally Day, Reaction Day, Inside Day and Outside Day....

• ### SIDEBAR: IMPLEMENTING THE SYSTEM

ARTICLE SYNOPSIS ...SIDEBAR: IMPLEMENTING THE SYSTEM The system described is complex, and therefore we are implementing it gradually, starting with a small prototype that automates only a small fraction of the total system. The expert system described here programs only some of those decisions that depend on market timing. It's built with the aid of the VP-Expert shell (knowledge base management system) Release 2.0, made by Paperback Software International. Its platform is the IBM PS/2 Model 55SX with 2 MB of RAM and a 30-MB hard disk with a double-sided 3.5-inch diskette drive, together with the MS-DOS 3.0 oper...

• ### SIDEBAR: RELEVANT FORMULAS AND CALCULATIONS

ARTICLE SYNOPSIS ...SIDEBAR: RELEVANT FORMULAS AND CALCULATIONS To calculate and adjust a mutual fund's annualized five-year return to maintain a top 30 ranking: First, convert the annualized five-year return (A) from NLFI to the full compounded return, as shown in column 3 for March 31, 1990. Thus, Fidelity Magellan's annualized 20.9% return becomes 158.3% (column 4). . ....

• ### SIDEBAR: STOCHASTIC OSCILLATOR

ARTICLE SYNOPSIS ...SIDEBAR: STOCHASTIC OSCILLATOR The stochastic oscillator is used to indicate overbought or oversold conditions on a scale of zero to 100%. The stochastic process is based on the observation that as price decreases, the daily closes tend to accumulate nearer the extreme lows of the daily range. Likewise, as price increases, the daily closes tend to accumulate closer to the extreme highs of the daily range. This concept also holds for monthly, weekly or even intraday time frames....

• ### SIDEBAR: WSJ FUTURES

ARTICLE SYNOPSIS ...SIDEBAR: WSJ FUTURES In The Wall Street Journal , you will find the closing prices of both the S&P 500 index and S&P futures in the futures table of the Index Trading Section. This sidebar gives a sample of the August 21, 1990, futures prices....

• ### The Cole Method For Trading Stocks by Alan Friedman

ARTICLE SYNOPSIS ...The Cole Method For Trading Stocks by Alan Friedman Is there a code that is used by insiders to alert each other as to which stock will move and to what price? As far-fetched as it seems, the late Roger Cole discovered such a code in the earlier part of this century that he used to profit in the stock market. Over the years, Cole handed down this method to traders, including one who now writes a newsletter based on this method. I found that the method has promise. For example, last August the method produced an up signal projection in American Airlines (AMR) to 102-107. On October 5, after Do...

• ### Two Filtered Indicators by Daniel E. Downing

ARTICLE SYNOPSIS ...Two Filtered Indicators by Daniel E. Downing By filtering two indicators, my firm and I discovered the Friday tick indicator and the last hour/ first hour indicator. These new indicators have shown an interesting relationship to the equity markets over the intermediate term, which we define as a period of four to six weeks. The indicators are easy to derive and follow. We came upon the idea of the filter when we were discussing whether any one day of the week is more significant than the others for the markets. We agreed that Friday was the most important day for trading, and so we decided t...