June Commentary

Lately, our efforts have been spent over a mathematical flaw when using a percent base filter on waves. The confirmation of a wave is based on a price retracement that is measured by applying a ratio to a peak or a trough. Since the value of a peak is larger than the value of a trough, the amount of price retracement in dollars and cents for a peak  has to be larger than what it took to confirm the trough. Since this value is only used for confirmation of peaks and troughs, our concern is mainly one of timing. Usually the trend is so strong that the signal is not delayed much. Another problem is when a security is consolidating and keeps coming back at a level.

Let's use an example for the first problem, if you have a trough at $10 and you use a 20% price retracement, the required price retracement will be $2 and the confirmation of the trough will be at $12 (10*20% added to the $10). If the price moves up to $20 and then comes down, we need a price retracement of 20% of $20 to confirm the end of the wave, hence $4, twice as much as the trough confirmation. A simple solution would be to use a fixed value instead of a percentage; that would mean we would need to use a different value for each security and as the security grows in value, we would need to adjust between patterns. The solution is worst than the problem. A better solution would be to compute the price retracement value required for a bullish wave by applying our percentage to the trough value even for the peak. The zigzag function cannot however use both types of input (price and percent) at the same time. However from an exit or entry standpoint, we can compute the initial value (from the trough in a bullish wave) retraced and subtract it from the assumed peak value. In our example, when the price would retrace $2 from the peak, we would consider this as a confirmation signal.                                                                         

Click on the image to enlarge.

Our second problem is illustrated in the above chart. When the price keeps coming back at a level that is not quite enough to confirm the peak but goes high enough to confirm the trough, we have a debasement of our waves. It means that a small pattern does not nest properly in a larger one. The large pattern does not end at the same bar as the small one. Look at the red zigzag and the blue zigzag lines in the ellipses. To overcome this problem, we can add code in the expert to make it use the trough or peak value of the largest pattern. This will make the count right but will not fix the zigzag function and all its derived functions such as peak and peak bars. To alleviate this later issue, we have recoded some indicators.

In the next product release, the abovementioned code will be available as well as a major renaming of the indicators. The later will make all AlphOmega indicators start by AO or AlphOmega. By regrouping our indicators, we make the user maintenance easier when you move from one release to the next. So far the development kit from MetaStock does not allow for removing obsolete indicators at the install of a new release.

AlphOmega Inc. will be closed for vacations between July 31st 2004 and August 15th 2004. The technical support will not be available during that period. We thank you for your support!