Topics for June
Copyright (c) 2000 Commodity Systems Inc. (CSI). All rights are reserved.
Topics discussed in this month's journal.
CSI will be
closed for voice communication on Tuesday, July 4th for the Independence Day
holiday. U.S. exchanges will be closed, but data from other exchanges will be
available at the usual time.
Low Margins and Improved Tools Fuel Futures Speculation
The sobering reality is sinking in -- stock prices simply will not rise indefinitely without correction. This painful lesson, recently relearned, has renewed traditional beliefs that favor speculating in futures markets. Software programmed to take advantage of low margin investment in futures has long been a source of hope for speculators worldwide. Exploring opportunities in these markets is now easier than ever when using the vast historical reserves supplied by CSI through the Unfair Advantage® system.
Customers regularly ask us questions about how they might get more involved in market analysis. The questions start with the big picture, like which markets are available online and what type of analysis results in successful trading. Beyond that, investors and would-be analysts want to know more about the specialized data sets regularly employed by commodity traders. This month's Technical Journal touches on some of the most important issues involving data and futures market analysis.
Examining a Market with Skimpy Data Reserves
The first problem seasoned stock traders encounter when setting out to conquer the commodity markets is skimpy historical data. Each commodity contract trades a limited number of months, while stock history can span decades. Fortunately, short-term data reserves can often be supplemented by concatenating the skimpy market with the historical data reserves of very similar markets. For example, to analyze a fledgling September 2000 Swiss Franc contract, one can concatenate all of the nearest Swiss Franc contracts backward in time by rolling into successively more distant contracts. The persistent rolling and splicing of prices over time is handled with Unfair Advantage's computed contract facility.
There are many forms of computed contracts and the exact style or approach to select usually depends upon the intended application of the data. UA offers various forms of forward, backward and proportional adjustments for smoothing transitions. Consider this simple list of alternatives and the likely merits of each:
Back-Adjusted Contracts - A back-adjusted contract's focus is always the nearest delivery month over time, with adjustments made to successive delivery months so as to provide a seamless series of prices. These spliced and rolled time series create a continuous contract that appears as though the entire series were one contract. The method used by UA preserves the contract identity, and the delta adjustments over time are factored into the displayed price. A back-adjusted contract has the advantage of reflecting the actual prices of the nearest contract, so no discrepancy exists between the current actual contract and the price of the back-adjusted series. Rules for rolling backward in time focus upon volume, and/or open interest, dates and trading days relative to the first or last calendar day of the month.
Gann Contracts - A Gann contract is a concatenation of annual periods of the same calendar delivery month over time. Gann style data are typically used in astrological applications.
Nth Nearest-Future Contracts - An Nth Nearest Future Contract is one which reports on the contract which is Nth (N=1st to N=last) in a list of all delivery months traded (first nearest, second nearest, etc.) Before the age of the personal computer, traders often tracked the delivery month which, when sorted by calendar month to delivery, lay in a designated sequential position forward. The purpose of choosing this option was to identify a delivery month that consistently represented a desired level of liquidity and volume, such that it would be representative of the commodity as a whole. Many traders, after years of following the markets, have consistently found this type of computed contract to adequately satisfy their market tracking needs.
Perpetual Contract® data -
This choice is often selected when the movement of the market, not the
contract, is germane to the user's likely application. This computed contract
represents a time-weighted average price of the two active contracts that lie
earlier and later than a fixed number of days and months ahead of the current
date. This method of calculation remains popular because it provides an
accurate view of the market's characteristic waveform over time that is
"perpetual" in nature. It is similar to the forward contracts offered by the
London Metals Exchange (LME).
The Value of Volume and Open Interest
Volume and/or open interest can be used to determine when to switch to the next successive contract in several types of computed series. Basing your roll-trigger on volume or open interest would allow you to avoid using lightly traded early contract history.
Volume and open interest can also be used as important technical indicators. They are reliable indicators that report the level of activity and the interest in a given market, and help to weigh the predictive reliability of price movement. Volume data also help to signal whether there is sufficient liquidity to assure you can make the trades you want. The open interest reading represents buyers who must sell or sellers who must buy in order to vacate the market. One buyer and one seller on opposing sides of the market represent an open interest of one, for example. These are statistics that one should follow to be sure there will be someone around to take the other side of your trade. A concept we at CSI like to examine is the net volume, which we define as the volume less the change in open interest. The net volume represents the overnight interests, the parties who stayed in for tomorrow, not those who left the market altogether.
Detrending - An Important Data Manipulation Step
In technical analysis, we often mix price levels from the past, when the dollar bought much more in terms of goods and services, with price levels today, when the dollar buys much less. The effect of detrending is to normalize prices such that the early history looks much like prices paid today. If you were investigating CBT Corn over the extensive period of history on file through UA, for example, the detrend option would put data from the 1950s on a proper relative scale. Failing to detrend would give much less weight to the early history, and would underestimate the importance in that very valuable data. Weather, temperature, the relationships between corn and other crops, the uses of corn, and the supply and demand of corn have all remained fairly constant over the past 50 years. When prices are not detrended, the lower relative prices of the distant past force an implicit assumption that the use and demand for corn has changed such that it was very much less important in 1950 than it is today. These facts may be difficult to argue, which is why detrending the input data for a computed contract is usually a good idea.
Getting the Big Picture
A disturbing inclination for novice commodity traders is to follow and analyze only one or two commodities, such as corn and soybeans. While it may be worthwhile to focus your trading in just a few markets of interest, it is imperative that you recognize that no market exists in a vacuum. All markets relate some way to all others, so others must be studied. Any trader interested in corn and soybeans cannot ignore the cost of fuel, for example. There is no question that many farmers have wished they paid more attention to fuel costs this past year. Many have left their crops in the ground because the harvest proceeds cannot cover the fuel needs to bring the crops to market. This advice applies to the stock markets as well, where the cost of raw materials impacts corporate profitability and sector components tend to perform in tandem. UA supplies statistics on every pertinent market on earth and opportunities can be quickly reviewed each day with little effort.
CSI now supplies Steve Briese's bi-weekly Commitment of Traders (C.O.T.) data via UA on alternating Tuesdays. These data are very important to every trader because they give insights into large trader interests in all the major commodities. No futures trader should be without this important information.
How Much History is Needed?
You know you have enough historical data if your back-testing exercise produces a sufficiently large sample to forecast a repeatable experience in actual trading, or an equivalent experience in simulated trading. All UA users have at their fingertips CSI's Trading System Performance EvaluatorT (TSPE) to help determine if this is the case. TSPE is a software simulation tool that is capable of analyzing trade-by-trade actual or simulated experience in an attempt to determine two key statistical facts: the probability that the experience is repeatable, and the capital necessary to fund the trading exercise in a real-life experience. Users who have paid the full UA licensing fee have unlimited access to TSPE, and users who have not are granted ten trial uses of the evaluation product.
TSPE takes the user's supplied string of profits and losses and degrades them to an extent determined by the liberties taken by the analyst in controlling the testing and simulation experience. The distribution of profits and losses over time is also examined for statistical normality. Normally distributed results require less penalty than highly skewed results, where profits are rare relative to losses. When given an honest report of the performance of one's trading approach, TSPE can give a realistic "thumbs up" or "thumbs down" to the derived system. TSPE is quite simple to use; finding a trading approach that can be certified as likely to provide a repeat performance is not quite so easy.
CSI's vast repository of world financial data and versatile software gives the trader all the resources necessary for in-depth market analysis. UA's data export facilities lend compatibility with many additional analysis programs (including Omega's TradeStation®), all of which can benefit from CSI's superior data accuracy.
As long as
there are financial markets, prices will surely fluctuate, and speculators will
continue to seek ways to benefit from those fluctuations. At CSI, we
continually work to provide new and innovative tools to make the trader's work
easier. Our goal is to help our customers explore and take advantage of
promising opportunities. We hope this overview of our specialized data sets and
other data considerations will help you with your computerized market analysis.
Become A CSI Business Associate and Earn Substantial Referral Fees
A CSI "business associate" is any individual, existing customer or business that earns or receives assistance and/or payment from CSI. Developers with outstanding performance records can also receive help in marketing their software to CSI customers. If you or your business requires market data to fuel your software product, CSI can help.
The rewards are substantial and both developers and existing customers participate under similar conditions. Both existing customers and the ultimate new customer also benefit from the data quality offered by CSI, anticipated economies of scale through lower overall data fees, and the opportunity to be informed about competent software developers who offer specialty trading products. The associate developer and associate customer share generously in referred new customer revenue.
CSI offers substantial market data on some 30,000 time series daily, C.O.T. data and historical reserves that reach back in time to the early 20th century. In an independent study published by Futures Magazine, CSI was named "the best" data supplier in the nation, inclusive of many visible market sources like Reuters®, Bridge/CRB®, Omega Research®, etc. CSI is known to enjoy an error rate that is hundreds of percent less than each of the ten international firms tested, and is also the premiere end-of-day data choice of every major financial Internet website in the world. The right data do make a difference!
information, please list your name, address, phone, e-mail, and any other
pertinent details about you or your company. This offer may not be retroactive
so act soon by taking the first step in the process of receiving substantial
bonus benefits from your referral or development efforts. We will mail or
e-mail our reply with full details on the conditions of this offer.
Stock Scanner T v.2.2 Coming in July
July CSI Technical Journal for important details on our enhanced Stock Scanner
T v.2.2 which will be a part of Unfair Advantage v.2.1.2. It will allow you to
effortlessly write your own studies and screening tools in a language easily
understood by everyone.
Uncovering Market Secrets with VantagePoint
We recently began a series of reports on CSI-compatible trading systems that I feel merit attention. Since this month's newsletter focuses on getting the most out of computerized market analysis, it seems a good time to introduce the unique VantagePoint product. Lou Mendelsohn, of Market Technologies, has spent much of his life perfecting this tool. Following my decades-long association with Lou, I can attest to his honesty, devotion and commitment to the pursuit of inter-market technical analysis.
VantagePoint is an analysis tool that captures the substance of several independently related markets, which combine to predict the movement of a specific market. There are several VantagePoint systems, and each employs similar strategies and testing procedures on subsets of independent markets that differ according to their predictive nature.
Technologies website offers several testimonials that introduce VantagePoint as
a capable inter-market analysis and neural network product. John Murphy, author
and technical analyst for CNBC, and many other prominent industry leaders have
written about the VantagePoint system, which thrives on the depth and scope of
CSI's immaculate worldwide data reserves. According to a documented
testimonial, VantagePoint has assisted users in doubling invested capital. One
user reported an 80% accuracy rate. Day traders, position traders and spread
traders have all found VantagePoint to satisfy their trading needs. We are
fortunate to have Shawn Matthews, recently of Market Technologies, on our
staff. She continues to use her expertise in consistently and courteously
assisting VantagePoint users.