Contents For DEC1993

  • Active Risk Management by Richard Gard

    ARTICLE SYNOPSIS ...Active Risk Management by Richard Gard The options market is often thought of as a simple directional play: Buy a call option if you're bullish or buy a put option if you're bearish. But options can also be used to manage a position. Here's a real-life example of a trade that started as a simple long future position, became a synthetic call option, mutated to a long derivative strangle and (finally!) ended up as a dynamic put ratio backspread. Often, traders using trend-following systems with passive risk management face day-to-day changes in the markets' direction that can challenge the dis...

  • Leading Indices At Bull Market Peaks by Tim Hayes

    ARTICLE SYNOPSIS ...Leading Indices At Bull Market Peaks by Tim Hayes So which indices do you think most reliably lead the market? To find out, STOCKS & COMMODITIES contributor Tim Hayes, who was also interviewed in the August 1991 issue, examined 14 indicators for their market forecasting ability, beginning early in the 20th century. The indicators that he studied ranged far in variety and included the categories of economics, market breadth and interest rates. Of the 14, two were judged to have performed the best in leading the market within these categories. What were they? Keep reading. Confirmation and div...

  • Markov Chains by George R. Arrington, Ph.D.

    ARTICLE SYNOPSIS ...Markov Chains by George R. Arrington, Ph.D. A Markov chain, the concept of which was developed in 1906 by Russian mathematician A.A. Markov, is a mathematical tool that traders might use to predict future price changes on the basis of past price changes. STOCKS & COMMODITIES contributor George R. Arrington explains how. A Markov chain is a mathematical tool that was developed in the early 1900s. It has been used in a variety of applications, including but not limited to forecasting weather changes, voting patterns, demographic trends, agricultural yields, insurance payout and even outcomes o...

  • SIDEBAR: CALCULATING WEIGHTED MOVING AVERAGES

    ARTICLE SYNOPSIS ...CALCULATING WEIGHTED MOVING AVERAGES The first step for calculating a weighted moving average (WMA) is to decide the lookback period (n) and the alpha (a). For our example in sidebar Figure 1, we are using n = 8 and a = 0.6 to calculate the optimized weighted moving average (OWMA) described in ""Weighted moving averages."" The OWMA is calculated in column E and is smoothing the put/call ratio calculated in column D. Each cell in column D is simply the ratio of the put volume in column C divided by the call volume in column B -- that is, cell D2 = C2/B2. Enter the alpha in cell F2; our example...

  • SIDEBAR: IMPLIED RISK

    ARTICLE SYNOPSIS ...IMPLIED RISK This version of the implied risk formula differs slightly from the original DYR version given in the June 1993 interview with Jim Yates, because this version uses average implied volatility of all of the options multiplied by the total option volume....

  • SIDEBAR: MARKET THRUST

    ARTICLE SYNOPSIS ...MARKET THRUST In a spreadsheet, the cumulative market thrust line and the thrust oscillator (TO) use the daily number of advancing issues, declining issues, upside volume and downside volume. In Figure 1, the NYSE Composite is column B, the number of advancing stocks is column C and the number of declining stocks is column D. The volume of advancing stocks is in column E and the volume of stocks declining in column F. The daily market thrust is calculated in column G. The following formula is entered into cell G2 and copied down:...

  • SIDEBAR: MATRIX MULTIPLICATION

    ARTICLE SYNOPSIS ...MATRIX MULTIPLICATION If matrix A is size (m n) and matrix B is size (n k), then the product of matrix A times matrix B is another matrix, AB, of size (m k). To find the element of the ith row and jth column of the product matrix, multiply each element of the ith row of A by the corresponding element in the jth column of B and then add these products. Example: Find the product of matrices A and B. (Matrix A and B are identical because we want to multiply matrix A by itself.)...

  • SIDEBAR: THE GREEKS

    ARTICLE SYNOPSIS ...THE GREEKS Delta: The rate of change of option price with regard to its underlying asset. An option with a delta of 25 will move 25% as much as the underlying asset. The delta of options changes with the distance of the strike price from the underlying. It also measures the equivalent unhedged position in the underlying. Calls have positive delta; puts are negative....

  • SIDEBAR: TREND REVERSAL

    ARTICLE SYNOPSIS ...TREND REVERSAL Before discussing the concept of a trend reversal, the proper way to draw a trendline must be discussed. If a market is in a downtrend, the trendline is drawn from the highest high to the lowest minor high before the lowest low on the chart. In sidebar Figure 1, two downward trendlines are drawn. Trendline A is incorrect because the line uses the minor high after the lowest low. Trendline B is the correct trendline because it uses the lowest minor high just before the lowest low. Finally, the trendline should not have any prices trading through the trendline between these two...

  • Talking With "Trader Vic'' Sperandeo by Thom Hartle

    ARTICLE SYNOPSIS ...Talking With ""Trader Vic"" Sperandeo Victor Sperandeo, money manager, economist and co-author of the popular Trader Vic: Secrets of a Wall Street Master and author of a second book due out this winter, is more than just a successful trader. A trading and investing success who by his own admission never went beyond high school, Sperandeo worked and studied at the school of hard knocks (otherwise known as Wall Street) for his string of successes. How did he do it? What's the secret? As usual, it comes out to hard work -- and study, lots and lots of studying. To find out the details, STOCKS & COM...

  • The Cumulative Market Thrust Line by Tushar S. Chande, Ph.D.

    ARTICLE SYNOPSIS ...The Cumulative Market Thrust Line by Tushar S. Chande, PhD. STOCKS & COMMODITIES contributor Tushar Chande originally introduced the concept of market thrust in August 1992 as a method by which to overcome the limitations of the Arms index. Since then, variations have been suggested on the theme and here, Chande offers the variation of a cumulative market thrust line, in which market thrust is cumulated to calculate a volumetric advance-decline line by including the effect of up and down volume. Simply stated, the advance-decline (A-D) line, which is a broad-gauge measure of market activity,...

  • Traders' Tips

    ARTICLE SYNOPSIS ...TRADERS' TIPS Do you have a custom formula, solution or user tip for your software that you would like to share? Have you ever pondered a trading question that you'd like to share with other readers? Have you ever contemplated a question for a while and come up with a solution that you'd like to share with others? Or are you still stuck without a solution? Send your formulas, solutions, tips and questions to Traders' Tips, STOCKS & COMMODITIES, 3517 SW Alaska St., Seattle, WA 98126-2700. Please send a hard copy and, if possible, the information on a disk in unformatted ASCII along with your n...

  • Using Neural Networks For Financial Forecasting by Lou Mendelsohn

    ARTICLE SYNOPSIS ...Using Neural Networks For Financial Forecasting by Lou Mendelsohn With this offering, STOCKS & COMMODITIES contributor Lou Mendelsohn concludes his examination of neural networks for financial forecasting in today's globalized trading environment. Here, Mendelsohn concentrates on implementation issues and discusses how neural networks should be utilized as part of an overall trading strategy. Finally, he takes a brief look at the future of artificial intelligence technologies to implement synergistic market analysis. No discussion of the design, training and testing of neural networks could ...

  • Weighted Moving Averages by Thomas Hutchinson and Peter G. Zhang, Ph.D.

    ARTICLE SYNOPSIS ...Weighted Moving Averages by Thomas Hutchinson and Peter G. Zhang, PhD. The moving average is well known and much used in the field of technical analysis, but it also has a flaw: its lack of flexibility. But it need not be fatal. First-time STOCKS & COMMODITIES contributors Thomas Hutchinson and Peter Zhang of MMS International present variations of moving averages to combat the lack of flexibility in simple moving averages and linearly weighted moving averages by introducing the general weighted moving average (GWMA). Moving averages are used in most forms of technical analysis to forecast t...