CSI Technical Journal
January 2003
Volume XXI, Number 1
In This Issue
Déjà vu? The Return of PDI
Tech Talk
Happy New Year!
On behalf of the entire CSI staff, best wishes for a safe, healthy and prosperous New Year!
Déjà vu? The Return of PDI
2003 -- This New Year puts us firmly into the 21st century, with much uncharted water ahead.
Before looking forward, let us first reflect on the words of Patrick Henry, who, more than two
centuries ago, said: "I know of no way of judging the future but by the past." Perhaps an even
better New Year's reflection for traders came in 1984 from John Naisbitt who, in his book
"Megatrends: The New Direction Transforming Our Lives," said, "The most reliable way to
anticipate the future is by understanding the present." We market analysts tend to meld the
wisdom of both these noted Americans by studying the past and present in our attempts to
forecast the future.
When I look back on the humble pre-beginning of CSI, the most interesting thing about the
early 1960s era is the fact that we managed as well as we did without personal computers. I can
see now that there was actually no good way to capture daily data reports in the late 1960s. We
did it anyway. I owned a GE Teletype terminal that I operated in my home, with which I sent
data to friends and associates who wanted to follow the futures markets. At 110 baud (110
characters per second), the transmissions were pitifully slow, but at the time it seemed like
lightning speed.
As far as I know, I was the first vendor in the U.S. to distribute market data (via acoustic
coupler) to individual traders. I remember one early competitor who briefly followed my lead,
but who soon disappeared from the horizon. The science of technical analysis didn't find a strong
following until the late 1970s when microcomputers became widely available. Many of our early
customers were serviced on Radio Shack's TRS 80 computers, and later on Commodore 64s and
Apple IIs. Still later came the Texas Instruments MiniComputer, and finally (still) the PCs.
We mid-20th century pioneers in computerized market analysis put up with the hassles and
sought ways to overcome many challenges because we had found a good way to learn and profit
from the markets. There was no doubt in our minds that our efforts improved our chances of
earning money off the futures markets that were designed to maintain a stable food supply. What
an opportunity!
My analysis told me that the future directional movement of futures markets was heavily
influenced by the combined and associated effects of two very important statistics that were, and
still are, often overlooked and neglected by traders. These statistics involve daily volume and/or
open interest reports. Combining volume and open interest market reports with price can help
you forecast future price movement by measuring the significance of daily price fluctuations.
I believed then and continue to believe now that futures traders have a significant edge over
stock-only traders because futures markets report open interest information. This critical data set
tends to define the number of players who will eventually vacate their positions. Keeping tabs on
the build-up of open interest during a future contract’s life helps the trader to understand the
makeup of the other market players.
Way back in the '60s we came to understand that when you subtract the daily trading volume
from the open interest reports, you are left with a volume reference that reflects the interests of
those who remain in the market for the given day. The difference represents the so-called daytrader influence. The growth in open interest from day to day represents the new “blood”
entering the market, and this happens to be a reliable indicator for measuring the quality of new
trader presence.
The movement of these important measures of trading activity will likely help identify the
market’s future direction. Volume, for example, has traditionally been considered to reveal the
significance of price action. Standard market interpretations tell us that when prices advance on
heavy volume, the tendency for the market is to sustain the price advance. A significant open
interest jump that is associated with rising price is likewise a bullish event. A price decline on
heavy volume or open interest, on the other hand, may forecast a further drop in price.
Conversely, any price movement that doesn't have high volume and open interest lacks support
and is likely to fizzle. Volume and open interest movement together with price will generally
affect future price depending upon the magnitude and direction of price, volume or open interest
movement.
Over a decade ago, CSI introduced a study as part of our QuickTrieve® software system that
used price, volume and open interest as market predictors. This study, known as the Probable
Direction Index™ (PDI™ for short) was hugely popular among CSI users. Many complained
that the study was not carried forward to Unfair Advantage.® PDI was the study of choice for
many who reported good success by simply basing their trading on PDI and associated studies.
Chart caption:
The above charts (from QuickTrieve) show the daily market prices of Soybean futures and the
PDI graphic for the same series. The PDI graphic shows an oscillating index and two
horizontal lines of significance, which can be considered buy and sell signals. The user is
allowed to set the thresholds for each market. See the caption for the charts on page 3 for
more on interpretation.
The charts on these pages were made by QuickTrieve's PDI study. They demonstrate the
study's predictive oscillator.
PDI is a probability reading derived from the relative daily movement of price, volume and
open interest. Although designed to study these three components, traders found that PDI could
work for stocks by focusing on the subset of price and volume data. Larger PDI readings (close
to 1.0) indicated the market might move upward in the future, and lower relative readings
suggested the market might move lower. Because of the way in which the PDI index was
calculated over time, there was a significant tendency for its accuracy to improve as more and
more data points were provided.
In this sense, one could argue that the study possessed heuristic attributes. PDI was not like
most popular studies, RSI or MACD, for example, because those studies will return the same
resulting values and form when given a small subset of a given time series. The PDI statistics
actually reflected a learning potential derived from the market’s past behavior. Weights applied
to volume, open interest and price varied over time as PDI learned from the predictive evidence
of the data supplied.
On the other hand, PDI was a calculation that viewed an ongoing short-term segment of the
historical past. The relatively short time frame was meant to keep your perspective as current as
possible without overlooking history's lessons. Anyone viewing a long-term chart may be fooled
by an overly broad perspective, which could lead you to remain in a market as it slowly moves
against you. If you limit your perspective to the relative merits of the short term, you won't be so
likely to hang on to a losing situation. In the event of short-term persistent losses, PDI would
quickly shift its emphasis to price only and follow the market in the prevailing direction.
Chart caption:
One interpretation of PDI signals is when the upper horizontal line (0.90) is touched by the
oscillator, a buying mode begins; when the lower horizontal line (0.10) is touched, a selling
mode begins. Using this procedure, one would remain in a position until the opposite position
is indicated. Mid-trade movement of PDI can be watched, but is not considered significant
until the opposite threshold is touched.
Dr. A. Elder, in his book "Trading for a Living" (John Wiley & Sons, 1993) made an apt
analogy, saying that a frog who jumped into a pot of boiling water would jump right out, but a
frog who was placed in a pot of tepid water would stay in the pot as it was heated, eventually
allowing itself to be boiled alive. Some stock market traders have been boiled alive over the past
couple of years because they didn't jump out of the proverbial pot. Since PDI’s design may help
such traders stay focused on immediate conditions and avoid painful and persistent losses, we
have decided to reintroduce the program.
In next month's CSI Technical Journal, we hope to announce that a new PDI study is ready for
release as a DLL within Unfair Advantage. The new PDI may be a little different from the
original, but the concepts behind the study will be the same. Re-engineering PDI will be my first
project for the new year, followed shortly by a fresh look at PDI's sister study called CSI Stop.™
That study reveals the price level where the forward price dynamics of a particular market are
likely to change direction. In the QuickTrieve days, traders told us that PDI and CSI Stop, when
used together, contributed positively to their trading success. It is our goal to make both of these
programs available to Unfair Advantage subscribers early this year.
We are beginning 2003 by revisiting some remarkable products from our past that deserve their
places in this 21st century. We hope that you will enjoy and benefit from them.
Bob Pelletier
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Tech Talk
Each month in this column, the CSI technical support staff addresses issues that may be of
concern to many subscribers though this question-and-answer forum. This month they discuss
using an FTP download as an alternative to UA's API, compatibility with MetaStock software,
reporting program errors and speeding updates on an older computer through adjustments to the
DMA setting.
Q. I use Unfair Advantage for data retrieval and nothing more, having developed my own fully
automated analysis system. I would prefer to avoid the approach used by UA's API for
processing data. Are there any other options for retrieving data without going through UA?
A. Ideally, UA's Application Programmer's Interface (API) would meet your needs, as it does for
many of our customers. We are currently making improvements that we hope will increase its
appeal to you. In the meantime, or as another alternative, you might consider switching to the
File Transfer Protocol (FTP) data transmissions that our largest commercial customers use.
These transmissions, which provide a straight data download, can be initiated by either a CSI
staff member or by a call from your computer. The transmission time is typically 7:30 PM ET for
the complete database.
Rates for the FTP service are significantly higher than for a standard UA account, as this is
considered a commercial service, but the benefits are worth the price in certain situations. If you
are interested, please contact CSI's commercial sales representative at 800-274-4727 or 561-3928663.
Q. I use MetaStock® and have recently had problems with spikes in my data. The puzzling thing
is that these apparent errors are only in my MetaStock charts, not the charts made by UA. The
folks at MetaStock tell me it's a compatibility problem. Please advise.
A. The spikes you have reported may indeed be a compatibility problem between MetaStock and
UA's CSIM-format files. MetaStock and Unfair Advantage are compatible so long as UA writes
its export files to the MS format. UA employs a DLL provided by the makers of MetaStock to
write those files, which are not adversely affected when they are modified by the MetaStock
software. Exporting to MS format is a simple process that can be arranged when you create or
modify your UA portfolios or through a menu selection to write the files on demand.
There have recently been changes to the way MetaStock handles data that have reduced
MetaStock's compatibility with the CSIM format (also an export option within UA). We
recommend that all MetaStock users stop using CSIM format and use exclusively MS format
files with MetaStock. CSI has an agreement with the makers of MetaStock whereby they have
provided us with the necessary tools to assure compatibility and we have agreed not to modify
their format. We intend to continue this relationship for the benefit of our many mutual
customers. We regret any inconvenience caused by the transition.
Incidentally, spikes did erroneously appear in the UA database for stock symbols T and AMCC
on 12/6. These stocks both declared dividends and had reverse splits on the same day, which we
mistakenly processed out of sequence. This rare occurrence led us to change our adjustment
procedure, so the problem won't be repeated. The spikes were remotely corrected through UA.
Q. I'm running an older version of UA and think I've found a bug in the program. What should I
do?
A. Please call or e-mail to tell us the specific problem you're encountering. Chances are good
that it has already been corrected in the current version of UA (v 2.6). We recommend that every
subscriber maintain an up-to-date copy of UA so that you can benefit from ongoing product
enhancements and development.
Q. My computer isn't what you'd call the latest and the greatest, but it works for me in all areas
except one; distribution of my downloads from CSI take over an hour. I tried the suggestions
listed in the 12/02 CSI Technical Journal to speed things up, but they didn't help much. Any
other ideas?
A. Since you have tried our non-hardware related suggestions for speed improvement, it seems
likely that your distribution time is being hampered by a sheer lack of power in your older
computer. You might get some relief by enabling the IDE DMA bus-mastering mode of your
computer's Microsoft operating system. (Not applicable for Windows 95 or for computers
manufactured before 1996.) When the DMA (Direct Memory Access) switch is set, information
passes to your drive in 512-byte groups instead of four-byte groups, which can result in
significant increases in speed.
We have used the DMA mode successfully on an older computer here at CSI, and in doing so,
decreased the download time from one hour to 12 minutes, an improvement of 80%. This
improvement is still not within the optimal time of one or two minutes.
Switching to the DMA bus-mastering mode is not without drawbacks. Undesirable results can
include (but are not limited to) an increased possibility of corrupting UA data files and damaging
your operating system to the point that it must be reinstalled. Any changes to the DMA setting
should be preceded by a full system backup and should only be undertaken at your own risk.
For information on and warnings about setting the IDE DMA bus-mastering mode, please see the
following articles in Microsoft's customer support library. Feel free to contact CSI's technical
support staff if additional assistance is needed.
Windows NT 4.0: http://support.microsoft.com/support/kb/articles/Q158/8/73.ASP
Windows 9x and Me: http://support.microsoft.com/support/kb/articles/Q258/7/57.ASP
An article on the kind of problems that can be encountered:
http://support.microsoft.com/support/kb/articles/Q190/6/30.ASP
Other suggestions are to make sure you are running the latest version of Unfair Advantage and to
be sure your portfolios do not include any delisted stocks.
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