Commentary

June Commentary

I would like this month to discuss the importance of selecting the proper sensitivity for indicators that require user input. This is true for all indicators that require parameter input. It may make a world of difference when we use inadequate values on a security. Sensitivity is a parameter that determines how much price retracement we require to confirm a peak or a trough. It will filter anything smaller thus not whipsawing trade signals. To illustrate our point, we select Alliance Atlantic Communications and our expert AlphOmega Elliott Swings. Our first look is with a sensitivity of 1%, if price while moving upwards falters and retraces that much, we consider this to be a small trend reversal. If we click on the first chart, we see that many signals are generated. While delighting for a broker, it is expensive for a trader. What happens if we increase the sensitivity value to 3%?

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The second chart shows much less signals while providing very good trades. It actually takes advantage of every change in trend as long as it is significant. Could we go on increasing the sensitivity value? When we increase the sensitivity value we actually decrease the sensitivity of the indicator; the number for the value is inversely proportional to the sensitivity itself. We could increase it to such an extent that we would have only a few trades but with considerable drawdown.

Let's give it one more try at 5%. A quick way of judging how much would be to find one price move that fits our investment horizon, find what was the largest retracement that we would like to avoid. Compare the value of the retracement over the value of the peak or trough it retraced. The sensitivity value should be a touch smaller. Our last adjustment is shown below with again less trades. There is a tradeoff between riding every intermediate trend with the same position and taking a new position for each of them. If the intermediate trend is large enough that it pays for itself,