Contents For
OCT1988
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Black-Scholes vs. Cox-Ross-Rubinstein By John W. Labuszewski and John E. Nyhoff
ARTICLE SYNOPSIS ...Black-Scholes vs. Cox-Ross-Rubinstein
By John W. Labuszewski and John E. Nyhoff
Professors Fischer Black and Myron Scholes of the University of Chicago introduced, in 1973, what
was to become the most commonly cited option pricing model. This was a fortuitous beginning because it
roughly coincided with the introduction of exchange-traded stock options on the Chicago Board of
Options Exchange (CBOE). A few years later, Professors John Cox, Stephen Ross and Mark Rubinstein
introduced another pricing model which now enjoys popularity second only to the Black-Scholes model.
Both models produce s...
BY: Technical Analysis, Inc.
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Custom messages Part 10 by Jim Summers, Ph.D.
ARTICLE SYNOPSIS ...Custom messages
Part 10
by Jim Summers, Ph.D.
Believe it or not, all the work we've done so far programming Lotus does not complete the Directional
Movement Index system (DMI). We also must include message modules -- the only way some correct
signals can come from your computer.
For example, virtually every commentator says crossing DI14 lines is the trading signal. Actually, DMI
developer J. Welles Wilder notes that this is only the first indication a trade should be considered. Before
entering a trade, several other criteria must be met. The ADX line -- the one which indicates the
existence ...
BY: Jim Summers, Ph.D.
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Dealing with conflict by Van K. Tharp, Ph.D.
ARTICLE SYNOPSIS ...Dealing with conflict
by Van K. Tharp, Ph.D.
Emotional conflict is one of the most significant problems that most traders (or people) have to deal
with in their lives. Yet explaining what it is or how it occurs is not easy. What follows is an interview
with a trader who went through a major improvement in his trading and life as a result of conflict
resolution.
Although the exercise had taken place almost five months prior to this interview, when he actually
described the conflict he relived it again. As a result, I've made few notes about his language patterns and
this behavior to illustrat...
BY: Van K. Tharp, Ph.D.
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Diagnosing market tops by Thomas Aspray
ARTICLE SYNOPSIS ...Diagnosing market tops
by Thomas Aspray
In the June 1988 issue of Stocks & Commodities, I discussed a few of the more than 250 indicators that I
use for stock market timing. I applied these indicators to some of the recent stock market bottoms. In this
article, I would like to show you how these indicators reacted at several market tops, including charts of
the current market. The formulas for these indicators were given in the previous article. Unfortunately,
the formula for the McClellan Oscillator was incorrect. The correct formula for the McClellan Oscillator
is the difference between a 1...
BY: Thomas Aspray
In This Issue by John Sweeney, Editor
BY: John Sweeney
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Letters To S&C
ARTICLE SYNOPSIS ...Letters To S&C
Volatility via Black-Scholes
Editor,
I have all the S&C magazines. In the July 1988 issue, ""Trading Clues from Options Volatility,"" David
Caplan says he uses a ""modified"" Black-Scholes model. Is this model defined in any of the back issues of
S&C? Can I get the formula from textbook in the local library? Would you explain it in letters to S&C in
the next issue?
JOHN CLINCH
Los Angeles, CA
When I mentioned in the article that I use a ""modified"" Black-Scholes model, it could be more properly
stated that the computer programs I rely on to compute volatility use this mod...
BY: Technical Analysis, Inc.
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Opening range breakout: early entry Part 2 by Toby Crabel
ARTICLE SYNOPSIS ...Opening range breakout: early entry
Part 2
by Toby Crabel
Early entry is defined as a large price movement in one direction within the first five minutes after the
open of the daily session. A study of early entry is essentially a study of price action, and the type of price
action that takes place on early entry shows that participants are urgent about entering the market. It is a
distinct recognition of either a profitable or dangerous situation.
It should be noted that directional moves of this nature are relatively rare and may occur only 10% of the
time. Most days (70% to 80%), prices e...
BY: Toby Crabel
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Price/dividends ratio by Arthur Merrill
ARTICLE SYNOPSIS ...Price/dividends ratio
by Arthur Merrill
An indicator that was shouting warnings before the stock market crash last year was the
price/dividends ratio. This indicator is a measure of expensiveness. It reports the current price of enough
stock to yield $1 in dividends. It's the inverse of stock yield.
Note Figure 1 which is based on the Dow Jones Industrial Average (DJIA). All price swings of less than
20% have been ignored, or filtered out. The price/dividends ratio was then calculated at each price
turning point by dividing the DJIA by the dividends in the preceding four quarters. The chart ...
BY: Arthur A. Merrill, C.M.T.
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Risk vs. exposure by Philip Gotthelf
ARTICLE SYNOPSIS ...Risk vs. exposure
by Philip Gotthelf
Flip a coin. What are your chances of ""heads,"" assuming a fair coin? The obvious answer is 50/50. The
probability of any event such as a coin flip is similar to the risk associated with an investment. In effect,
risk is a function of probability.
This concept has become increasingly misunderstood as new investment vehicles flood the market with
apocryphal labels of ""limited risk."" Are options really limited risk investments? What about limited risk
futures spreads or limited risk penny stocks?
All too often, we confuse the concept of risk--the probabi...
BY: Philip Gotthelf
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The 40.68-month stock price cycle by Gertrude Shirk
ARTICLE SYNOPSIS ...The 40.68-month stock price cycle
by Gertrude Shirk
Of the thousands of possible rhythmic cycles in hundreds of subjects that the Foundation for the Study
of Cycles has studied over the years, one we have reported on repeatedly since November 1951 is the
40.68-month cycle in stock prices.
Cycle analysts were aware of a rhythm in stock market averages of about 40 to 41 months (from crest to
crest) for many, many years. Over a long period of time, this cycle was dominant enough to be visible by
inspection of the data, before trend removal or any other manipulation came into use. The Foundation...
BY: Gertrude Shirk
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The tragic neglect of the old masters by James Alphier
ARTICLE SYNOPSIS ...The tragic neglect of the old masters
by James Alphier
I still become physically queasy when I recall my shock and surprise as I read a short article written by
James Dines some years ago. In it, he related how he had asked an assemblage of Market Technicians
Association members how many of them had read anything written by the ""founding fathers"" of technical
analysis. Only a handful gave a positive response.
The same feeling returned almost four years ago when I became involved in a rather complex discussion
with three MTA members. I referred to concepts originated by Garfield Drew and Pa...
BY: James Alphier
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Volume as a proxy for time by Robert Pisani
ARTICLE SYNOPSIS ...Volume as a proxy for time
There are numerous ways to display the market information contained in Market Structure charts. The
standard format consists of three parts (Figure 1): the Market Structure Histogram on the left side of the
chart, volume at each price displayed in time sequence in the chart's center, and the total volume for each
time period on the bottom of the chart.
The market progresses simultaneously through two dimensions: time and volume. Thus, one can measure
the market's progress either by counting time or by counting transaction volume. Although the latter
measurement is ...
BY: Robert Pisani