ARTICLE SYNOPSIS ...Avoiding Overconfidence by Van K. Tharp, Ph.D. If I could give just one piece of advice to a trader, it would be: Avoid overconfidence--it could be your worst enemy. Thousands of traders make the mistake of becoming overconfident each month and lose substantial amounts of money. For example, the following incidents were brought to my attention just recently: r A trader -- whom we will call Henry -- needed to make $7,000 each month to meet his living expenses. This particular month was exceptional; he made $20,000 in two weeks making low-risk trades and following his own trading rules. He was f...
BY: Van K. Tharp, Ph.D.
ARTICLE SYNOPSIS ...Cross Your Arms by Richard W. Arms Jr. The dinner had been marvelous, the wine had been perfect, and now my wife and I were arriving at the theater. I knew we were right on time, and I had the tickets in my inside coat pocket. As we walked up to the entrance we realized that the theater was dark, and when we tried the door it was locked. I looked at the tickets, of course -- and found that we were a night too early. The show would not open until the next evening. We had done everything right except the timing. It was the right show at the right theater, but we had wasted our energy because of ...
BY: Richard W. Arms, Jr.
ARTICLE SYNOPSIS ...Diversification And Risk by Raymond Rothschild No method of stock or equity selection is perfect. Even the best of schemes can fail. For example, suppose we had a system of selecting stocks with a probability of success of two thirds. The probability of failure, then, would be one third. The odds of success versus failure are therefore 2 to 1. Assume for the moment that we invested our total capital and that each time an investment succeeded we would double our money, but a failure would result in a complete loss. A1-though the probability of winning on the first try is good, a high probabili...
BY: Raymond Rothschild
ARTICLE SYNOPSIS ...Do Five-Year Growth Rates Mean Anything? by Lewis Carl Mokrasch, Ph.D. The five-year growth rate, usually of earnings, is a common index of a company's well-being. Other factors being the same, you would want to own the stock of a company with a high five-year growth rate and avoid or sell short the stock of a company with a negative growth rate. In financial or advisory publications such as Financial World or Barron's, the five-year growth rates are calculated and presented as significant data when stocks are being discussed or compared. Obviously, it's worth a look to find out how to calcu...
BY: Lewis Carl Mokrasch, Ph.D.
ARTICLE SYNOPSIS ...Double-Smoothed Momenta by William Blau The prices of stocks and commodities are usually plotted as bar graphs. In a bar graph, each bar represents a certain time interval, be it an intraday, daily or weekly bar. The last price in each time interval is designated as the close. For certain markets, the daily close is actually a price determined from the period that makes up the closing range. The close, or settlement price (the price at which all outstanding positions in a stock or commodity are marked to market), could be considered the most important piece of trading data. One reason is tha...
BY: William Blau
ARTICLE SYNOPSIS ...Form And Pattern As A Trading Tool by Robert Miner Pattern recognition has been the topic of much technical literature. From the Elliott wave theory to Edwards and Magee, traders have been told that some fairly well-defined chart patterns indicate the market's position and the most likely outcome of the ensuing market activity, as indicated from a particular chart pattern. While it is important for every trader to be familiar with traditional chart patterns that have been found to be reliable indications of the market position, it is also important for the trader to analyze any individual mar...
BY: Robert Miner
ARTICLE SYNOPSIS ...John McGinley of Technical Trends by Thom Hartle The Technical Trends newsletter, originally published by technician Arthur Merrill, presents statistical analysis of the stocks and futures market in graphic form. STOCKS & COMMODITIES Editor Thom Hartle and Technical Editor John Sweeney spoke with John McGinley, Technical Trends' editor, via a telephone interview on February 21,1991. (See also in this issue Arthur Merrill's article, ""Testing indicators."") JS: So what do you like to trade, anyway? Oh, if I trade anything it's the NYFE contract. That's the only thing I've ever dabbled in. T...
BY: Thom Hartle
ARTICLE SYNOPSIS ...LETTERS TO S&C GOING UP Editor, I have some doubts about the procedures explained in one of Arthur Merrill's recent columns, ""Testing Indicators"" (STOCKS & COMMODITIES, May). Mr. Merrill outlines a method of assessing the significance of an indicator by reviewing the performance of the DJIA in the weeks and months after the indicator turns positive. He prepares a ""batting average"" of the number of times the DJIA showed gains versus the number of times the DJIA showed losses, and he also tests the significance of the indicator with a chi square formula. I think the upward bias of the o...
BY: Technical Analysis, Inc.
ARTICLE SYNOPSIS ...Relative Strength Investing by Robert L. Hand Jr. Many believe that the stock market is rigged and the average small investor has no chance against the institutional investors. In reality, the stock market gives the individual investor more opportunity to profit, because they can be investors, not traders. Traders look to invest with a short time horizon, with their objective being to outperform the market average by catching stocks at their maximum momentum rise in price. Investors, on the other hand, have a long time horizon, which allows them to look for companies whose business they simpl...
BY: Robert L. Hand Jr.
ARTICLE SYNOPSIS ...PROBABILITY CONSIDERATIONS Statistics using a binomial formula to calculate failure and success probabilities of stocks, page 215....
BY: Technical Analysis, Inc.
ARTICLE SYNOPSIS ...TWO VERSIONS OF THE RSI FORMULA Derivation of the RSI formula containing an exponential moving average, from the basic RSI formula, page 205....
BY: Technical Analysis, Inc.
BY: Technical Analysis, Inc.SUBJECT: Technical Analysis, Inc.
ARTICLE SYNOPSIS ...Testing Indicators by Arthur A. Merrill, C.M.T. Analysts consult scores of indicators to get clues for the future. At any given instant, however, some of the indicators are bullish and some are bearish. They are never unanimous. Which should we believe? Which should be given the most weight? Too often, I suspect, analysts tend to give the most weight to the indicators that happen to agree with the analysts' own convictions. If the analyst is bullish, he tends to believe the bullish indicators; if he is bearish, he likes the bearish indicators. This bias may be totally unconscious. To avoid ...
BY: Arthur A. Merrill, C.M.T.
ARTICLE SYNOPSIS ...The Historical Dow by Carl Sundquist Recently, The Wall Street Journal completed 94 years of continuous publication of the Dow Jones Industrial and Railroad (now Transportation) averages. Quite a record. Charles Dow, the first editor and founder of The Wall Street Journal, is credited with the compilation of the original averages. He did not use a weighted mean or make adjustments of any nature but simply added the closing price of the stocks in his averages and divided the total by the number of companies in his list. The Dow Jones Industrial Average (DJIA) as we know it dates back to Octob...
BY: Carl Sundquist
ARTICLE SYNOPSIS ...The Skimming Discussion Continues by John Sweeney Remember the moving average ""skimming"" discussion that's gone on over the last several issues? I received another cogent letter describing the effect for a half-wave moving average. Amos Newcombe of Manor Lake, NY, makes the point that to ""skim"" tops and bottoms precisely, the amplitude of any inherent cycle must be the same size as any trend over one-quarter of a cycle: This is in reply to your article ""Average Behavior"" [STOCKS & COMMODITIES, April 1991]. You say that the half-cycle moving average moves along the bottom of rising tren...
BY: John Sweeney
ARTICLE SYNOPSIS ...Using Spread Orders To Roll Forward by Csaba Radnoty Most futures contracts have a delivery mechanism that involves the exchange of physicals for cash. Understandably, few traders want to deal with the delivery process. To liquidate positions nearing delivery and to establish new ones, traders use spread rolls, a technique used when rolling forward to a new contract month. Most speculators prefer trading futures contracts that have the greatest amount of volume and open interest, which provide the greatest liquidity. Usually, it is the front month that meets these qualifications. As the contr...
BY: Csaba Radnoty