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Technically Speaking, March, 2005

From the Editor’s Desk

This month’s newsletter is the largest that we have published in recent memory. There are two reasons for that - the Seminar announcement and the incredible contributions from the membership. The second half of the newsletter is devoted to providing complete details on the upcoming Seminar. The intent is to answer any question you may have and allow you to decide whether or not this event is for you. I’m sure you’ll agree with me that this event is for anyone with an interest in the markets. Even without the seminar announcement, we would have a very large newsletter thanks to groundbreaking articles submitted by our own members and affiliates. This newsletter is a great opportunity to publish short pieces of research. Although it is not necessary to write in accordance with the scholarly standards of the Journal of Technical Analysis, we will gladly accept thoroughly tested ideas that can help fellow traders profit. Frank Testa provided an article on a new point-and-figure technique and Eric Davidson wrote about a practical means of attaining a disciplined approach to trading.

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What's Inside...

What an Honour

by Jordan Kotick, CMT

I mentioned two key people last month who were instrumental in our recent success with the NYSE and NASD. This month, I want to shine the spotlight on a third, a gentlemen without whom, like John...

The MTA Says Thank You

by John R. Kirby

Last month I gave you the news that the NYSE had accepted the CMT 1 and CMT2 as an alternative to the series 86 for technical analysts. Shortly on the heels of that announcement, but too late for...

Incorporating Volume into Point & Figure Charting

by Frank E. Testa, CMT

Editor’s Note: This article is best read in the full-color PDF edition of Technically Speaking, available on the MTA web site. The P&F charts included in this article are in color. They are...

Chi Squared

Arthur Merrill, CMT, was a leading advocate of the need to apply statistical rigor to technical analysis methods. He frequently employed the Chi squared test to assess the validity of his backtested...

Advance Decline Divergence Oscillator (ADDO)

This indicator was developed by Arthur Merrill, CMT, who passed away in January at the age of 98. Arthur tracked this indicator publicly in his newsletter, Technical Trends, for many years. Below is...

Decision Making

by Robert Colby, CMT

Robert Colby, CMT, spoke at the educational meeting of the New York MTA Chapter on November 15, 2004. This presentation can be downloaded in its entirety from...

Conversations with the Board of Directors

by Michael Kahn, CMT

The MTA is changing, and those changes are intended to lead to broader respect of technical analysis within the investment community. After less than six months of assessing the current state of the...

The Competency Model

by Eric Davidson, CMT

In the Summer/Fall 2004 issue of The Pristine View, Andrew Kezeli described the stages of growth a trader must experience on the way to mastery via the use of the Competency Model (“Trading...

Regions Committee Update: Where the Rubber Meets the Road!

by Tim Snavely, CFA, CMT

The regions committee continues to work hard to develop its structure and programs to better facilitate the MTA’s mission – increasing the exchange of technical market analysis among dedicated...

What an Honour

What an Honour

I mentioned two key people last month who were instrumental in our recent success with the NYSE and NASD. This month, I want to shine the spotlight on a third, a gentlemen without whom, like John Kirby , like Ralph Acampora, we simply would not have been successful. This gentleman is David Krell.

As some of you may be aware, David is a Past President of the MTA and also an MTA member. He is the President of an SRO himself and even though these recent CMT-friendly and MTA-boosting decisions did not affect his business directly, he nonetheless dedicated a lot of time, effort and patience with our efforts. He was, in effect, the Master of Ceremonies of the entire process and production. He advised and councelled, he guided the MTA through and around the rocks and potential potholes of the process. Like I mentioned last month, if you think that

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Not a member? Join the CMT Association and unlock access to hundreds of hours of written and video technical analysis content, including the Journal of Technical Analysis and the Video Archives. Learn more about Membership here.

Contributor(s)

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The MTA Says Thank You

The MTA Says Thank You

Last month I gave you the news that the NYSE had accepted the CMT 1 and CMT2 as an alternative to the series 86 for technical analysts. Shortly on the heels of that announcement, but too late for press time, the NASD made a similar announcement.

This was a long and hard process for the MTA, but we also need to be thankful. The regulators were tough, but they also listened, and they took us seriously. After the announcement, Stuart Kaswell drafted, and with the approval of your board sent a thank you letter (reprinted below) to the regulators.

These people served the MTA well. They do not get many thank you letters. If you would like to add yours thanks to them, please go ahead.

Sincerely,
John Kirby

To view this content you must be an active member of the CMT Association.
Not a member? Join the CMT Association and unlock access to hundreds of hours of written and video technical analysis content, including the Journal of Technical Analysis and the Video Archives. Learn more about Membership here.

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Incorporating Volume into Point & Figure Charting

Incorporating Volume into Point & Figure Charting

Editor’s Note: This article is best read in the full-color PDF edition of Technically Speaking, available on the MTA web site. The P&F charts included in this article are in color. They are reproduced here in blackand-white, but readers familiar with basic P&F techniques will have no trouble understanding the shading.

Point & Figure Charting provides an excellent mechanism for pinpointing precise buy/sell levels, as this charting method is solely concerned with plotting price movements in columns occupied by “X’s” and “O’s” to denote buying and selling demand, respectively. However, the shortcoming of this charting method is its total disregard for the importance that time and volume play in the formation of a stock’s pattern. As most market technicians acknowledge, volume often precedes price. To this end, I have devised a way of incorporating volume and time into the Point & Figure method of charting as describe in more depth below.

To

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Not a member? Join the CMT Association and unlock access to hundreds of hours of written and video technical analysis content, including the Journal of Technical Analysis and the Video Archives. Learn more about Membership here.

Contributor(s)

Frank E. Testa, CMT

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Chi Squared

Chi Squared

Arthur Merrill, CMT, was a leading advocate of the need to apply statistical rigor to technical analysis methods. He frequently employed the Chi squared test to assess the validity of his backtested results. This difficult concept is usually explained over the course of several dozen pages in collegelevel statistics textbooks. Demonstrating his extraordinary ability to make the complex simple, Art published this concise and understandable explanation in his newsletter in August 1986:  

If, in the past, the records show that the market behavior exhibited more rises than declines at a certain time, could it have been by chance? Yes. If a medication produced cures more often than average, could it have been luck? Yes.

If so, how meaningful is the record? 

To be helpful, statisticians set up “confidence levels.” If the result could have occurred by chance once in twenty repetitions of the record, you can have 95% confidence that the result isn’t

To view this content you must be an active member of the CMT Association.
Not a member? Join the CMT Association and unlock access to hundreds of hours of written and video technical analysis content, including the Journal of Technical Analysis and the Video Archives. Learn more about Membership here.

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Advance Decline Divergence Oscillator (ADDO)

Advance Decline Divergence Oscillator (ADDO)

This indicator was developed by Arthur Merrill, CMT, who passed away in January at the age of 98. Arthur tracked this indicator publicly in his newsletter, Technical Trends, for many years. Below is the description of the ADDO, as written in May 1985 and originally published in that newsletter: 

The most popular method of noting disparity of the A/D line with the Dow is to visually compare a cumulative curve of (A– D) with a curve of the Dow Industrials. This is difficult, since one is a price curve and one is a cumulation, which could start anywhere.

We have developed a formula to solve this problem using regression. The resulting index can be interpreted easily: When it is positive, the Dow is tending to pull ahead of A/D; when it is negative, the Dow

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Decision Making

Decision Making

Robert Colby, CMT, spoke at the educational meeting of the New York MTA Chapter on November 15, 2004. This presentation can be downloaded in its entirety from http://www.mta.org/membership/video/20041115Colby/index.htm. In his talk, Robert provided answers to several challenging questions:

  • Can we take the guesswork out of investing and trading?
  • Is there any method for finding decision-making systems that can help us maximize reward/risk performance in the future?
  • Does historical precedent really mean anything?
  • Is back testing relevant and necessary?
  • Should we even bother to optimize?
  • How can we feel confident about our methods?
  • Can we free ourselves from opinion, bias, hope, greed, and fear?

Bob began his presentation with an in-depth discussion of the exponential moving average (EMA). He observed that it is not really a moving average, but is technically a smoothing of data based on its calculation method. It is his opinion that the EMA is the best moving average and is increasingly preferred by technicians. The

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Contributor(s)

Robert Colby, CMT

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Conversations with the Board of Directors

Conversations with the Board of Directors

The MTA is changing, and those changes are intended to lead to broader respect of technical analysis within the investment community. After less than six months of assessing the current state of the organization, the Board of Directors seated in July of last year held an intensive retreat at the MTA headquarters in Woodbridge to chart the way ahead. During a weekend of often intense debate, they found much right with the MTA. However, there is always room for improvement, and that meeting with a strong resolve to capture the talents and energy of the MTA membership to build on more than 30 years of tradition and strengths.

Director Michael Kahn took a few moments to respond to some questions about what members and affiliates should expect to see in the near future.

Q: The Board of Directors has added member communications to your responsibilities – can you describe what this includes?

A:

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Contributor(s)

Michael Kahn, CMT

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The Competency Model

The Competency Model

In the Summer/Fall 2004 issue of The Pristine View, Andrew Kezeli described the stages of growth a trader must experience on the way to mastery via the use of the Competency Model (“Trading Survival 101”). In this article, I will break down the competency model (Figure 1) even further, so that each student can gain a clearer understanding of each step required towards mastery in the field of technical speculation. It is my belief that when purpose and clarity are coupled with discipline and drive-over long stretches of practice, hard work, and time-the road towards success becomes not only possible, but inevitable.

The Competency Model

FIGURE 1

Stage 1 – Unconscious Incompetence
Stage 2 – Conscious Incompetence
Stage 3 – Conscious Competence
Stage 4 – Unconscious Competence

Moving into Stage 2

Once we recognize that we are ill-equipped as new traders and self-directed investors to compete in the trading arena, what

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Not a member? Join the CMT Association and unlock access to hundreds of hours of written and video technical analysis content, including the Journal of Technical Analysis and the Video Archives. Learn more about Membership here.

Contributor(s)

Eric Davidson, CMT

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Regions Committee Update: Where the Rubber Meets the Road!

Regions Committee Update: Where the Rubber Meets the Road!

The regions committee continues to work hard to develop its structure and programs to better facilitate the MTA’s mission – increasing the exchange of technical market analysis among dedicated professionals and educating the public as to the benefits of technical analysis. To this end, we have several initiatives under way. If you would like to help, please contact Tim Snavely at tim_snavely@rhco.com

  1. Probably the most exciting thing that we are doing at the Regions level is CHAMPIONING BETTER TECHNOLOGY for the organization as a whole! We continue to advocate a much better website, and the Regions Committee shared a proposal for improving our website with the MTA Board last December. Virtually all of our constituents use technology for capturing data, reviewing charts, and analyzing financial markets. The MTA has a strong technology backbone, but it needs a facelift on the front-end. A more web-centric MTA could enable us to better share

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Not a member? Join the CMT Association and unlock access to hundreds of hours of written and video technical analysis content, including the Journal of Technical Analysis and the Video Archives. Learn more about Membership here.

Contributor(s)

Tim Snavely, CFA, CMT

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New Educational Content This Month

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