STOCKS & COMMODITIES magazine. The Traders' Magazine

Article Archive For DEC1991

  • "Stopping" A System by John Sweeney

    ARTICLE SYNOPSIS ...""Stopping"" A System by John Sweeney Once you get hold of an idea, it's often tough to get rid of it, especially if it shows no promise whatever. It tugs at the back of the mind--what was it about the original insight? What was valid? What was bogus? I hate to admit that my subconscious could have produced a bummer. Closing last month's Settlement, I mused, ""Reasonable progress, but what next? Could something simple work profitably?"" My first thought on returning to the subject and reviewing Figures 1a and 1b was that the losses were pretty big. Those needed to be reduced in size, if not n...

  • Assessing Risk In An Equity Portfolio by Jean-Olivier Fraisse, C.F.A.

    ARTICLE SYNOPSIS ...Assessing Risk In An Equity Portfolio by Jean-Olivier Fraisse, C.F.A. Portfolio management is a balancing act -- enhancing returns by systematically investing in the most promising assets while simultaneously limiting the variance of returns (that is, risk). What is the nature of investment risk in an equity portfolio and how is it measured? When considering an asset for inclusion in a portfolio, most investors will focus on the asset's expected total return and on the variance of returns. While high expected returns are desirable, a large variance implies a wide dispersion of returns, and th...

  • Candlesticks And Preserving Capital by Gary S. Wagner and Bradley L. Matheny

    ARTICLE SYNOPSIS ...Candlesticks And Preserving Capital by Gary S. Wagner and Bradley L. Matheny Candlestick analysis, the Japanese charting method introduced by Steve Nison to Western technicians only a few years ago, has been slowly gaining acceptance to help the technician make profitable trading decisions. As candlesticks become more common among Western technicians, an amalgam of candlesticks and traditional Western analytical rules will emerge. An important but often overlooked trading rule that may benefit is the use of protective stop-loss techniques to preserve capital and encourage sound money manageme...

  • Combining P/E Ratio With Earnings Growth Rates by Pamela H. Brown and William G.S. Brown

    ARTICLE SYNOPSIS ...Combining P/E Ratio With Earnings Growth Rates by Pamela H. Brown and William G.S. Brown The price/earnings (P/E) ratio is widely used in fundamental stock analysis. It serves to normalize earnings so that stocks with widely varying earnings may be compared reasonably. The P/E ratio of a market index such as the Standard & Poor's 500 composite stock price index typically remains within certain boundaries. When investors are pessimistic and the market seems to have nowhere to go but down, the market P/E will be near 7. When confidence is high and investors view the market as having no place to...

  • Comparing The CRB With Bonds by Jim Bianco, C.M.T.

    ARTICLE SYNOPSIS ...Comparing The CRB With Bonds by Jim Bianco, C.M.T. The Commodity Research Bureau (CRB) price index and the bond market have frequently been compared in the past because of their interrelated natures. The CRB is considered to be an indicator of inflation, and changes in the rate of inflation can affect investors' desire to hold bonds. The index, which tracks 21 commodities, is weighted toward agricultural products (about 62%), and because of its emphasis on agriculture, some investors tend to disregard it -- an error, because the index serves as an excellent proxy for commodity inflation. To d...

  • Fidelity's Philip Erlanger by Thom Hartle

    ARTICLE SYNOPSIS ...Fidelity's Philip Erlanger by Thom Hartle Fidelity Management and Research Co.'s senior technical analyst Philip Erlanger is a major force behind one of the most successful managed-fund companies in the country. He arrived at technical analysis in a roundabout way starting as a stock broker for Reynolds Securities in the 1970s, getting interested in computers along the way even before the I BM PC revolutionized the industry and working as an analyst for Advest before coming to Fidelity, where he analyzes industry groups stocks and the market looking at junk bonds and currencies. STOCKS & COMM...

  • Fitting a Trendline by Least Squares by Arthur A. Merrill, C.M.T.

    ARTICLE SYNOPSIS ...Fitting A Trendline By Least Squares by Arthur A. Merrill, C.M.T. Usually, trendlines are drawn through tops or bottoms. They are also drawn through the center of prices by a lagged moving average or by eye (Figure 1). A straight line through the center of a price channel, if the scale is logarithmic, will give you the percentage growth or decline rate. If the straight line is drawn by eye, it is subject to debate. This question can be resolved by a mathematically calculated line called ""least squares"" (Figure 2). The deviations of the points from the line are marked A, B, C, D and E in Fi...

  • Letters To S&C

    ARTICLE SYNOPSIS ...LETTERS TO S&C PARAMETRIC CONTROL AND SAMPLE SIZE Editor, ""Stopping a system"" by John Sweeney (Settlement, December 1991) may have suggested a misleading lesson to your readers. John introduced what appeared to be a very normal response concerning the system he was analyzing. Profits were too small, so he decided to introduce stops to improve the results. In fact, his change improved the system's profitability five-fold. What John did was add a new parameter without deleting an old one or increasing the sample size. When parameters are added to a process, freedom, in a statistical sense,...

  • Market Fuel And Technical Analysis by D. Earl Essig

    ARTICLE SYNOPSIS ...Market Fuel And Technical Analysis by D. Earl Essig When traders hunt for the Holy Grail of commodity trading in futures and options, obvious clues to market direction are often overlooked. One such oversight generally occurs in analyzing price patterns as related to volume and open interest. Definitions may also differ from trader to trader, causing further confusion. Here, both definition and situation can be clarified and summarized to make the task of detecting market direction easier. SOME BASIC DEFINITIONS Total volume: The amount of contracts traded on any given day of all listed mon...

  • On-Line Data Addiction by Van K. Tharp, Ph.D.

    ARTICLE SYNOPSIS ...On-Line Data Addiction by Van K. Tharp, Ph.D. One of the most useful tools for the modern trader is the on-line quote monitor, which gives the trader a minute-by-minute picture of what is going on in the market. It allows the trader to position a trade much more advantageously than someone who does not have such access. Thus, it can theoretically save or make a trader thousands of dollars. In many cases, however, the on-line computer can also be a trader's worst enemy. Find out if having a quote screen in front of you is beneficial or harmful to you by answering ""true"" or ""false"" to these...

  • SIDEBAR: ASSESSING A SINGLE EQUITY INVESTMENT

    ARTICLE SYNOPSIS ...ASSESSING A SINGLE EQUITY INVESTMENT The total return on an equity investment reflects both capital gains and periodic income such as dividend payments. Specifically:...

  • SIDEBAR: BUYS AND SELLS

    ARTICLE SYNOPSIS ...BUYS AND SELLS In Figure 3a, the greatest buying opportunity occurs when price action becomes strong at a time that many are doubters. Depicted are indicators of both price strength and investor sentiment. Relative and absolute strength are indicators of price. When Merrill's relative strength line is rising, its stock price is outperforming the market. When Merrill's absolute strength line is rising, then Merrill's stock is behaving better than it typically does, given Merrill's beta and the current market action. (Beta measures a stock's sensitivity to the direction of the market.) Points P...

  • SIDEBAR: FIGURING THE NUMBER OF PERIODS IN AN ANNUITY

    ARTICLE SYNOPSIS ...FIGURING THE NUMBER OF PERIODS IN AN ANNUITY Often, investors anticipate a need for a given amount of funds at some future date. One way to guarantee that such funds will be available is to put aside a series of payments at predetermined intervals, known as an annuity. When the payments are made at the beginning of the period, the' series is known as an annuity due. When made at the end of the period, as assumed here, the series is an ordinary annuity. The value of an ordinary annuity is the sum to which the payments would accumulate, assuming that all are invested at some fixed compound int...

  • SIDEBAR: MEASURING ASSOCIATION BETWEEN RETURNS ON TWO ASSETS

    ARTICLE SYNOPSIS ...MEASURING ASSOCIATION BETWEEN RETURNS ON TWO ASSETS The covariance between the total returns on two assets X and Y is defined as the average over the entire period of the products consisting of asset X's return in a given subperiod less its average return for the whole period, multiplied by asset Y's subperiod return less its average return. Specifically:...

  • SIDEBAR: SHORT INTEREST AND LEVEL OF PAIN

    ARTICLE SYNOPSIS ...SHORT INTEREST AND LEVEL OF PAIN Generally, short interest is a monthly statistic presented on a current-month versus previous-month basis. Viewing one or two months of short interest data is, unfortunately, a tantalizing but less than satisfying experience. To appreciate short interest data, it is necessary to gather as much historical information as possible, including price and volume as well as short interest data. The objective is to determine which stocks and groups have been most ""wrongfully"" shorted -- that is, the degree that price has advanced against established short positions. S...

  • SIDEBAR: UNDERSTANDING STANDARD MATHEMATICAL SYMBOLS

    ARTICLE SYNOPSIS ...UNDERSTANDING STANDARD MATHEMATICAL SYMBOLS It is inevitable that today's technician will encounter steps to calculating an indicator that uses standard mathematical symbols that appear to be beyond simple arithmetic. In reality, these symbols are simply shorthand notation for no more than basic arithmetic. The following is a guide and interpretation to mathematical symbols commonly seen in STOCKS & COMMODITIES. By convention, the first few lowercase letters of the Roman alphabet (a, b, c) are used to denote constant terms or coefficients. A constant is simply a value that does not change. F...

  • The Essence Of Dow Theory: Confirmation And Divergence by Richard L. Evans

    ARTICLE SYNOPSIS ...The Essence Of Dow Theory: Confirmation And Divergence by Richard L. Evans The Dow theory tenet that the Dow Jones Industrials and Dow Jones Transports must ""confirm"" one another is listed perfunctorily in most Dow theory discussions, but confirmations and divergences are the gist of Dow theory. In an article in the July 1991 STOCKS & COMMODITIES, I discussed some nuances of Dow theory divergence and nonconfirmation. Briefly, Dow theory says that both the industrial and the transportation averages must confirm to have forecasting implications. Any signal on the part of one index without con...

  • Trading The Eclipse Cycle by Hans Hannula, Ph.D., C.T.A.

    ARTICLE SYNOPSIS ...Trading The Eclipse Cycle by Hans Hannula, Ph.D., C.T.A. The ancients saw eclipses of the sun and moon as something mysterious and magical. The high priest of the day controlled the masses by telling them: ""Look out, there is an eclipse coming. Do as I say to avoid its ill effects."" The modern-day equivalent, the modern stock market adviser, advises the trading and investing masses much the same way: ""Look out, there is an eclipse coming. Trade and invest as I say to avoid its ill effects."" And sometimes there is an effect. Look at the Dow Jones Industrial Average (DJIA) for August 6, 19...

  • V.9:12 (482-485) SIDEBAR: Explaining r by Jim Bianco, C.M.T.

    ARTICLE SYNOPSIS ...EXPLAINING r Correlation analysis measures the degree of relationship between two variables. The correlation coefficient r is one popular statistical index for this purpose. The values for r range between +1 to -1; a +1 reading indicates that the two variables are perfectly correlated, while a -1 reading indicates a perfect inverse relationship. An r of 0 indicates that the two variables have no correlation. The correlation coefficient r measures the relationship between two variables that are believed to be linear. For instance, a straight line is used to describe the relationship if the two...







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