V. 9:5 (188-189): Letters To S&C

V. 9:5 (188-189): Letters To S&C
Item# \V09\C05\LETTER.PDF
$3.95
Availability: In Stock

Product Description

LETTERS TO S&C

GOING UP

Editor,

I have some doubts about the procedures explained in one of Arthur Merrill's recent columns, "Testing Indicators" (STOCKS & COMMODITIES, May).

Mr. Merrill outlines a method of assessing the significance of an indicator by reviewing the performance of the DJIA in the weeks and months after the indicator turns positive. He prepares a "batting average" of the number of times the DJIA showed gains versus the number of times the DJIA showed losses, and he also tests the significance of the indicator with a chi square formula.

I think the upward bias of the overall market distorts these tests. To illustrate: I've attached a similar score prepared by assessing all of the monthly S&P 500 closes from 1947 to mid-1991. No indicator was testedÑ or you could think of these figures as testing an indicator that has always been positive since January 1947. The batting average and chi square test showed that this non-indicator was followed by gains more often than chance would explain, with 0.999 confidence would explain, with 0.999 confidence throughout. My data is in Figure 1.

You would expect a batting average around 0.5 and a confidence below 0.9 for a truly random distribution. A correction for bias needs to be incorporated. Would simply taking the natural logarithm of each period's close be effective?

JOSHUA NEWMAN

Lafayette, CA




FOR THOSE ORDERING ARTICLES SEPARATELY:
*Note: $2.95-$5.95 Articles are in PDF format only. No hard copy of the article(s) will be delivered. During checkout, click the "Download Now" button to immediately receive your article(s) purchase. STOCKS & COMMODITIES magazine is delivered via mail. After paying for your subscription at store.traders.com users can view the S&C Digital Edition in the subscriber's section on Traders.com.




Take Control of Your Trading.
Professional Traders' Starter Kit
All these items shown below only $299.99!
  • 5-year subscription to Technical Analysis of STOCKS & COMMODITIES, The Traders' magazine. (Shipping outside the US is extra. Washington state addresses require sales tax based on your locale.)
  • 5 year access to S&C Archive
  • 5 year access to S&C Digital Edition
  • 5-year subscription to Traders.com Advantage.
  • 5-year subscription to Working Money.
  • Free book selection.
  • Click Here to Order