Your Letters - July/August 2001

Editor,

I thank you most warmly for the trial issue of Working Money. After thorough consideration, I have decided to try trading online. But I have many questions to be answered first:

1. Which websites or trading firms can provide me with training to get started in online trading?
2. What software and hardware configuration do I need for my PC?
3. How much initial capital do I need to invest?
4. Should I invest with a broker or other such agency to further my knowledge?
5. The last and the most important question for me, as a foreign national, is: What are all the formalities
and regulations I need to follow to proceed?

Thank you.

Dhiraj Wadhiya, via e-mail, Pimpri Pune, India

It's not clear from your letter whether you're considering a direct-access broker or a traditional, online broker. You can find information on both types in the Traders' Resource section of the Working Money website at Working-Money.com. System requirements as well as initial capital requirements vary from broker to broker, so you'll need to follow up with individual brokerages; for example, deposit requirements can range from zero or $500 to $10,000 or more. Today, orders can be placed online simply by using a personal computer and an Internet connection, although for real-time daytrading, real-time data access (rather than delayed data) and other tools may be required.

Your brokerage should also be able to help you with your question regarding requirements for foreign nationals. As for education, you may wish to consider attending one of the daytrading schools available today, if your interest is in active daytrading rather than just investing by placing orders online. You can hunt these down using the Internet. The various online brokerages also provide a good deal of education in online trading at their websites, such as the learning center at Datek.com. You can visit most of those sites for information even if you are not an account holder. In addition, many books have been written to help traders and investors get started. Although we haven't reviewed them, here are a few:

Brown, David L., and Kassandra Bentley [1999]. Getting Started In Online Investing, John Wiley & Sons.

Walks you through the various stages of the investing process while highlighting tools for each. Covers brokers, online trading, bonds, mutual funds, and futures, as well as website resources for news, portfolio management, education, research, and more.

Deel, Robert [2000]. The Strategic Electronic Day Trader, John Wiley & Sons.

Without the proper training and mental preparation, the great equalizing power of your computer is dangerously seductive. In the highly specialized, fast-moving world of electronic trading, you must learn new strategies and mentally prepare yourself for this high-tech arena of profit and loss.

Deforge, Kristine [2001]. Getting Started In Online Brokers, John Wiley & Sons.

A reference of existing online brokerage firms. Reviews broker services and commissions, broker accessibility, and execution speeds.

Harris, Sunny J. [2000]. Getting Started In Trading, John Wiley & Sons.

This primer for the novice trader walks readers through the process of trading stocks or futures, from hardware to trading systems to picking a broker.

Nassar, David S. [1999]. How To Get Started In Electronic Day Trading, McGraw-Hill.

Provides an overview of the dynamics that drive stock prices and the various kinds of electronic access, as well as the strategies employed by daytraders. In addition to providing information about how to open a direct-access account, Nassar stresses the importance of developing a focused trading strategy and recommends working with a simulator before risking real money.

Finally, the Securities and Exchange Commission offers advice and facts on online trading at its website at http://www.sec.gov/investor/online.shtml. Included here are articles such as "Plain Talk About On-Line Investing" and "10 Tips For Online Investors." Good luck! -- Editor

CANDLESTICK CHARTING

Editor,

Very nice article in the May 2001 Working Money on candlesticks ("Candlestick Close-Up: Three White Soldiers," by Sharon Yamanaka). Congrats!

Greg Morris, via e-mail

Sharon Yamanaka replies:
Thank you for writing. I'm very flattered you found my article interesting, considering you are, in my book, a foremost expert on candlestick charting.

Editor's note: Because a number of readers have requested information on candlestick charting seminars, Greg Morris of MurphyMorris, Inc., author of Candlestick Charting Explained: Timeless Techniques For Trading Stocks And Futures (Irwin Professional Publishing), currently gives seminars on investing and candlestick charting. Information on his seminars can be found at his website:

MurphyMorris, Inc.
4601 Langland Rd., Suite 105
Dallas, TX 75244
972 404-4529
972 404-4582 fax
glm@murphymorris.com
http://www.murphymorris.com

CANDLESTICK PATTERNS

Editor,

Has anyone backtested the concept of buying stocks when three white soldiers are showing versus three black crows?

Joe Wilkerson, via e-mail

Sharon Yamanaka replies:
Yes, we backtested the system using MetaStock. The three white soldiers were used as an entry point and three black crows as an exit. In order for the system to recognize enough white soldier-black crow patterns, we had to make allowances for opening gaps. Other than that, it was a straightforward test of the simple white soldier-black crow pattern. The system, going back to when AOL first became public, did no better or worse than a buy-and-hold strategy, both making about $8,000 on a $1,000 initial investment.

When the moving average convergence/divergence (MACD) indicator was added to the test, the system became much more reliable during nontrending periods, whereas before MACD was added, it had been slowly losing equity. Candlestick reversal patterns are meant to be used during trends, so it makes sense another indicator should be used otherwise. MACD is also a trend-type of indicator, but it works so well with AOL I used it anyway. The return on the system incorporating the MACD and white soldier-black crow pattern was $15,000 for a $1,000 investment.

Thanks for writing. Figure 1 shows the entry/exit and equity curves for these systems. I will also post the MetaStock code on our website at Working-Money.com.

entry

body1:=Abs(Ref(O,-opt1)-Ref(C,-opt1));
body2:=Abs(Ref(O,-opt1+1)-Ref(C,-opt1+1));
body3:=Abs(Ref(O,-opt1+2)-Ref(C,-opt1+2));
cond1:=Ref(C,-opt1)+body1*opt2>Ref(O,-opt1+1);
cond2:=Ref(C,-opt1+1)+body2*opt2>Ref(O,-opt1+2);
cond3:=Ref(C,-opt1)-Ref(O,-opt1)>0;
cond4:=Ref(C,-opt1+1)-Ref(O,-opt1+1)>0;
cond5:=Ref(C,-opt1+2)-Ref(O,-opt1+2)>0;

diff:=Mov(C,opt4,E)-Mov(C,opt5,E);
signal:=Mov(diff,opt6,E);
cond6:=diff>signal;

cond1 AND cond2 AND cond3 AND cond4 AND cond5 OR cond6

exit

body1:=Abs(Ref(O,-opt1)-Ref(C,-opt1));
body2:=Abs(Ref(O,-opt1+1)-Ref(C,-opt1+1));
body3:=Abs(Ref(O,-opt1+2)-Ref(C,-opt1+2));
cond1:=Ref(O,-opt1+1)+body2*opt3>Ref(C,-opt1);
cond2:=Ref(O,-opt1+2)+body3*opt3>Ref(C,-opt1+1);
cond3:=Ref(O,-opt1)-Ref(C,-opt1)>0;
cond4:=Ref(O,-opt1+1)-Ref(C,-opt1+1)>0;
cond5:=Ref(O,-opt1+2)-Ref(C,-opt1+2)>0;

diff:=Mov(C,opt4,E)-Mov(C,opt5,E);
signal:=Mov(diff,opt6,E);
cond6:=diffcond1 AND cond2 AND cond3 AND cond4 AND cond5 OR cond6

OPT1
Range: From 3 to 6 by 1
Current value: 3

OPT2
Range: From 0.3 to 1 by 0.1
Current value: 0.6

OPT3
Range: From 0 to 1 by 0.1
Current value: 0.6

OPT4
Range: From 20 to 20 by 2
Current value: 20

OPT5
Range: From 36 to 36 by 4
Current value: 36

OPT6
Range: From 3 to 3 by 1
Current value: 3
-- Dennis Peterson

CANDLESTICK BASICS FOR NOVICES

Editor,

I would like to thank Sharon Yamanaka for sharing her insights in her May 2001 Working Money article, "Candlestick Close-up: Three White Soldiers." I am a novice investor and read as often as time permits. I have found few articles that have been so well written and so easily understood. It takes talent and knowledge to make a complex issue simple.

I simply want to inform you that the printed magazine format of the article makes it harder to grasp than does your website's version at Working-Money.com, which has a much more read-friendly format.

As I mentioned, I am just beginning to learn about investing and would like to get as much detail as I can. There is just so much information and so many approaches that I welcome simple, well-articulated informational sources.

I wish to thank you for a job well done.

Nate Rogers, via e-mail

Sharon Yamanaka replies:
Thank you for writing an encouraging, not to mention flattering, letter. As for the print format of the article, I was trying to make the "Candlestick Close-up" sidebar stand alone so readers could read either the sidebar or the article and still get the idea. That layout, however, does cause some repetition and some page-flipping to go between the two. We appreciate your feedback that the website posting was easier to follow. I'll rethink the format the next time I'm putting together that type of article.

As for "knowledge," I have a scientific and statistical background and, in another life, worked as a biologist. Many of the statistics used in technical analysis originated in scientific research and I was familiar with them from that context. It fascinates me to see how well some of those scientific concepts translate to market analysis -- particularly the means, standard deviations, Bollinger Bands, chi-squared, and other measures.

I've been actively investing through an online broker for about four years. Before that, I researched mutual funds and put my money in the most promising one. I am an investor rather than an active trader and as such look for long-term, relatively low-maintenance, low-risk types of investment systems. I also look for systems I can implement without the use of professional trading packages or datafeed lines, although those are available to me at the magazine, and I did backtest the white-soldiers/MACD system. Other than that, I get all my information from financial websites. What a boon those and online brokerages are to the average investor!

I'm planning more articles for Working Money, so look for those! I am currently researching sector investing. Jay Kaeppel wrote a very interesting article for our companion publication, Technical Analysis of STOCKS & COMMODITIES, The Traders' Magazine (July 1999), called "A System For Trading Fidelity Select Funds" using sector rotation that I've always wanted to modify to my needs and use for investing. That'll be coming up soon.

CANDLESTICK CHARTING: FURTHER READING

Editor,

The references listed at the end of Sharon Yamanaka's May 2001 article, "Candlestick Close-Up: Three White Soldiers," are not available. Please suggest other books on candlestick charting.

Bernadette Dooney, via e-mail

Sharon Yamanaka replies:
It's true the two books cited at the end of my article aren't readily available at bookstores, but one of Nison's other books, Japanese Candlestick Charting Techniques, is available through online bookstores and probably can be special-ordered through a brick-and-mortar bookstore.

The other book that was cited, CandlePower, is out of print but may be found at a library or secondhand bookstore. Look for the more current book by Greg Morris, Candlestick Charting Explained: Timeless Techniques for Trading Stocks and Futures.

BUY AND HOLD

Editor,

R.M. Sidewitz's April 2001 article in Working Money, "Is Buy-And-Hold The Strategy For You?" was interesting. I would like to ask Sidewitz what other indicators or systems he uses that could assist buy-and-hold investors. I've visited the products/services at www.longterminvestor.org (the site listed at the end of the article) and www.cybrlink and neither seem to provide further information on the discussion.

In addition, Sidewitz's books listed at the end of the article in the "Related reading" section appear to discuss options trading, not buy-and-hold strategies. I would like to find out more about Sidewitz's efforts toward increasing buy-and-hold profitability.

Thanks again for the insightful articles in Working Money.

Frederick Johnson, via e-mail

R.M. Sidewitz replies:
Many individual investors are faced with the challenge of the amount of time that they can dedicate to managing their investments. In the final analysis, most opt for the buy-and-hold approach because it requires little, if any, work once the selection process has been completed. I feel that, in making this choice, they short-change their investment results.

A buy-and-hold investor rarely looks at issues such as:

1. How do I protect my profits from eroding?
2. How do I define a profit objective?
3. How much should I risk on this position?

Overlooking these questions can prove to be quite costly in the long run. An investment portfolio may be compared to a garden: For it to produce the largest bounty, it needs care and attention. A good investment is rarely a good investment forever; therefore, it needs stewardship.

In addition, most long-term investors get caught up in stockpicking, which I believe is a serious error. Here's why:

Of primary importance is to make the investment selection process as simple and statistically likely to succeed as we can. Therefore, we should never look at individual stocks. I realize that sounds extreme.

However, it's widely acknowledged that more than 87% of all professional money managers don't outperform the Standard & Poor's 500 stock index with any degree of consistency, even though the market has had an upward bias 73% of the time since 1900. That's pretty amazing, yet when we consider the managers' selection process, the outcome is quite understandable.

In order to have a "winner," three conditions most often need to be met:

1. The broad market should be moving upward (a one-in-two likelihood)
2. The industry group corresponding to the stock in question should be moving upward (another one-in-two likelihood), and
3. The outlook for the stock should be positive (the last one-in-two likelihood).

The probability of correctly picking a "winner" thus becomes one in two times one in two times one in two, or only one in eight chances. That's a fool's game.

My organization, Qi2, has attempted to create high-probability methodologies that allow the investor to achieve his/her goals with a minimum of hands-on time expended. One such method, available for a limited time, is our Strategic Seasonal System (www.longterminvestor.org/childsplay.htm).

Stated simply, the system has identified those times of year when the market is most predisposed to risk. At those times, under the system guidelines, we exit the markets and "park" our capital in a risk-free instrument such as Treasury bills. Then, when the high probability of risk window has passed, the investor reenters the market via instruments that function as stock index proxies. This method has significantly outperformed the averages for more than 30 years and requires little administrative time from the investor.

We are currently finalizing the specifications on a new approach that has produced a compound rate of growth of 10.6% for 80 years! Once we have it fully functional, we'll post information about it at www.longterminvestor.org.

I will admit my articles most often present a viewpoint that resides outside the mainstream of conventional investment thought. If it causes anyone to stop and reconsider his or her perspective about investing, as I believe it has done for you, Frederick, then I am most gratified. Thank you for taking the time to write; my best wishes for your continued investing success.

SPOTLIGHT: MUTUAL FUND RETURNS

Editor,

It would really add to your magazine if, when you spotlight a mutual fund, you would give its year-to-date, one-year, and three-year return, as well as whether it's a load or no-load fund. In addition, any toll-free numbers, the minimum required investment, fund fees, and risk factors would be a plus.

For example, on page 39 of the May 2001 issue of Working Money, the Spotlight on Invesco Funds was a nice article but it didn't give anywhere to go to get information on Invesco's Blue Chip Growth fund.

Tom Vath, via e-mail

In our Spotlight section, we don't spotlight one fund; rather, we spotlight an entire company (or fund "family"). Thus, we don't list returns of individual funds. We do, however, usually provide the contact information for the fund company, where you can go to get returns and other information for all the funds in that family. Some companies have many funds, and the listing of returns and other information you mention can be very long. - Editor

INTERNET WRAP ACCOUNTS

Editor,

Just finished reading John Sweeney's interview with John C. Bogle of Vanguard in the April 2001 Working Money.

Bogle presents some very convincing statistics. But the most astounding was his statement about Internet wrap accounts. Would you give us an article on these accounts? How are they related to mutual funds? How could they lead to the demise of mutual funds? How are they like mutual funds and how are they different? The most remarkable statement was, "It can work better than index funds." How can this be? Would appreciate more information if you can.

Gene Ramey, via e-mail Yuma, AZ

Thanks for writing with your article suggestions. We appreciate input from our readers. - Editor

Copyright © 2001 Technical Analysis, Inc. All rights reserved.