DEC 1990 STOCKS & COMMODITIES Magazine

Article Archive For DEC1990

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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...

AUTHOR: Jerry Felsen, Ph.D.DATE: DEC1990

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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...

AUTHOR: Jean-Olivier Fraisse, C.F.A.DATE: DEC1990

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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 ...

AUTHOR: Ron JaenischDATE: DEC1990

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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 ...

AUTHOR: Arthur A. Merrill, C.M.T.DATE: DEC1990

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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...

AUTHOR: Gregory L. MorrisDATE: DEC1990

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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...

AUTHOR: Ralph VinceDATE: DEC1990

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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...

AUTHOR: Thom Hartle and Melanie F. BowmanDATE: DEC1990

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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...

AUTHOR: Harold A. KreamerDATE: DEC1990

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NYSE Bullish Percent As An S&P Indicator by Thomas J. Dorsey

AUTHOR: Thomas J. DorseyDATE: DEC1990

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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...

AUTHOR: Roger Altman, Ph.D.DATE: DEC1990

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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 ...

AUTHOR: Palmer Wright, Ph.D.DATE: DEC1990

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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....