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Ahhhh Grasshopper,
It's not surprising that you see such good things in your charts. Afterall,
markets are fractally symmetrical. A chart generally appears the same across
all time frames. All your indicators reflect price momentum in one way or
another, so it's only natural they confirm each other, even across multiple
time frames.
To understand what I mean, have someone make several charts of the same
security using different time frames. Print them out and have them cut off
the X-axis showing time period. Bet you'll have a hard time figuring out
which is which.
It's these repeating market rhythms that make Elliott Wave and Fibs so
enticing. My main problem with EW is that I CAN'T SEE THE DAMN WAVES!
Doesn't sit well with my mechanical system ideas either.
Fibs on the otherhand, seem to work quite well, especially in determining
various lookback lengths. Haven't really come across any convincing argument
as to why they do, but they do.
As for the stochastic brain teaser, I'll point you to Elder p.142 last
paragraph. Implies the stoch is impossible to test historically over any
significant length of time. Good indicator in the present but not for
building a robust system on. His 5% comment provides a good clue though as
to what is needed to make it more robust.
FYI, a good public primer on the weaknesses of traditional momentum
indicators is Tushar Chande's work with the CMO, stochRSI, and DMI. However,
he still doesn't give you a mathematically precise way of determining where
to place OVERBOUGHT and OVERSOLD cutoffs.
That's why you need to substitute a STATISTICAL measure of trend, so cutoffs
can be placed 2 standard deviations (5%) away from the mean on a historical
basis. To this end, the Random Walk Index seems well suited, but details
about it's actual construction are a little hazy as it's author never really
spells it out. Metastock is even vague.
My quant friends here say they've solved it, but won't share the solution.
Secrets like these is what gets them the 7 figure incomes, I guess ;-).
As for how to tell what's tradable and what's not, generally the upside
should be at least 3 times the downside. You can use average true range,
price channels, or minimum favorable excursion to calculate this, for
example.
All this posting is making me hungry and thirsty,
Rick
Tokyo, Japan
-----Original Message-----
From: Steven Buss <sbuss@xxxxxxxxxxx>
To: Rick Mortellra <rmjapan@xxxxxxxxxxxxx>; MetaStock List
<metastock-list@xxxxxxxxxxxxx>
Date: Tuesday, January 20, 1998 9:07 AM
Subject: Re: Stochastic brain teaser
>Speaking of the stochastic specifically:
>
>A few weeks ago I asked about the same issue in a different manner. I
asked
>about how one could distinguish (or test) between stochastic
>breakouts/breakdowns that were tradeable vs. untradeable for profit. The
>only answer I remember getting back was that price itself was the
>confirmation. This makes sense and can be useful I think.
>
>The only problem is that sometimes you get a stochastic breakout/breakdown
>with an accompanying movement in price only to find later that it doesn't
>get you very far. (I think this is the point you're making Rick.) That's
>why I, and I believe many others, have found the stochastic to be alluring
>yet in the end disappointing.
>
>But if you look carefully at the S&P500 chart I sent out earlier today,
>you'll see that there is another potential confirmation indicator for a
>stochastic breakout/breakdown in the topmost indicator section shown in the
>2nd indicator section. Follow each stochastic breakout/breakdown in the
>topmost indicator section, compare to price value and direction, and then
to
>the stochastic value and direction in the 2nd indicator section. If I'm
not
>mistaken, the stochastic value and direction shown in indicator section 2
>would have been an incredibly accurate indicator for assessing the
"quality"
>of the stochastic breakout/breakdown in indicator section 1.
>
>I could have sent hundreds of charts of varying multi-periods that
>illustrate the same thing. If I seem to have been foaming at the mouth
>about this, it's because I have found hundreds of examples of this. I'm
NOT
>saying it provides 100% confirmation. I am saying that the kinds of
>relationships you see in that graphic are the standard ways these
>relationships work not the exceptional ways.
>
>So, Rick, I disagree that testing the stochastic specifically over
>historical data is problematic because of what we might call price/value
>differences among lookback periods for the same kind of oscillator
>breakout/breakdown signal. The problem is that we haven't had the
"concept"
>or the software to test indicators at multiple periods within the same
test.
>
>Steven Buss
>Walnut Creek, CA
>sbuss@xxxxxxxxxxx
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