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 reallife
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 trendfollowing systems with passive risk management face daytoday changes in
the markets' direction that can challenge the dis...
BY: Richard Gard

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...
BY: Tim Hayes

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...
BY: George R. Arrington, Ph.D.

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...
BY: Technical Analysis, Inc.
BY: Technical Analysis, Inc.

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:...
BY: Technical Analysis, Inc.

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.)...
BY: Technical Analysis, Inc.
BY: Technical Analysis, Inc.

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...
BY: Technical Analysis, Inc.

Talking With "Trader Vic'' Sperandeo by Thom Hartle
ARTICLE SYNOPSIS ...Talking With ""Trader Vic"" Sperandeo
Victor Sperandeo, money manager, economist and coauthor 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...
BY: Thom Hartle

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 advancedecline line by including the
effect of up and down volume.
Simply stated, the advancedecline (AD) line, which is a broadgauge measure of market activity,...
BY: Tushar S. Chande, Ph.D.

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 981262700. Please send a hard copy and, if
possible, the information on a disk in unformatted ASCII along with your n...
BY: Technical Analysis, Inc.

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 ...
BY: Lou Mendelsohn

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. Firsttime 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...
BY: Thomas Hutchinson and Peter G. Zhang, Ph.D.