C
29 1 5 12 19 26 August
82.50
80.00
77.50
75.00
72.50
70.00
67.50 The bars at A, B and C are all relatively narrow-range bars that represent short-term consolidations. Applying specific entry rules allows you to take advantage of moves out of the consolidation when volatility increases.
FIGURE 1 IDENTIFYING SHORT-TERM VOLATILITY CHANGES
Source: CQGNet
Opening s h o t s
Narrow-range bars and inside bars represent short-term volatility lows out of which price can move sharply. This strategy uses a simple volatility measurement to determine where to enter trades to capitalize on this behavior.
TRADING Strategies
and the second the opening range break-out preference (ORBP).
The stretch value is the 10-day aver-age of the difference between the open and the low or high, whichever is small-er. For example, if the open was 79.50, the high was 80.33 and the low was 77.98, you would use the diff e re n c e between the open and the high (0.83) vs.
the open and the low (1.52). Figure 2 (top) shows the stretch range for IBM over the last year: from an extreme of just under $1 to just over $0.20, with the average just over $0.50.
The entry strategy using ORB is to place a buy stop just above the opening price plus the stretch amount, and place a sell stop just below the opening price minus the stretch amount. The first stop t r i g g e red is the trade, and the other auto-matically becomes the protective stop.
If other technical indicators provide evidence of a strong trend, then use the ORBP: Place the entry stop in anticipa-tion of the trend continuing. For exam-ple, if the stock is in an uptrend, enter only a buy stop above the opening price plus the stretch amount. If filled, place the protective stop below the stre t c h subtracted from the open.
Time is of the essence
According to Crabel, the earlier in the trading session the entry stop is hit the more likely the trade will be profitable at the close. A trend triggered quickly in the session could rack up a substantial profit by the close and should be held for a possible two- to three-day run.
Once filled (and if the market is exhibiting a strong trend early), then move the protective stop to breakeven. If you are not filled early in the session, reduce the size of the position as time passes through the day. Any positions filled near the close are suspect. In this case, you may have only a small unreal-ized profit, and probably should not hold the trade overnight.
Rules in action
Figure 3 (bottom) is Figure 1 with the
ACTIVE TRADER • April 2003 • www.activetradermag.com 41
Day
$1.20
$1.00
$0.80
$0.60
$0.40
$0.20
$0.00
The “stretch” is an amount added to a bar’s opening price to determine the entry point and stop level, respectively.
FIGURE 2 TAKING A STRETCH
IBM (IBM), daily
A
B C
29 1 5 12 19 26 August
30-day EMA
82.50
80.00
77.50
75.00
72.50
70.00
67.50 Whether a market is in a trend (defined here by a 30-day EMA) dictates the trade entry technique that is used.
FIGURE 3 FACTORING IN THE TREND
Source: CQGNet continued on p. 42
addition of a 30-day exponential moving average (EMA). Bar A is the IDnr4 day.
Considering the market moved above the previous resistance level at 72.50 in the act of confirming a double bottom pattern, and the 30-day EMA was rising and provided a support level, it’s logical to conclude the stock is in an uptrend.
Accordingly, we want to use the ORBP guidelines.
At this time, the stretch was 0.49. The next day IBM opened at 71.55, so the
entry stop price was 72.04 (71.55 + 0.49) and the stop loss was 71.06 (71.55 – 0.49).
That day IBM climbed as high as 73.78, fell as low as 71.19, and closed at 71.90.
In this situation, when there is no profit at the close, you should take the loss (in this case, 14 cents plus any slippage).
Bar B is the NR7 bar. The market is clearly in an uptrend, and the prudent thing to do is trade with the trend, again following the ORBPguidelines. After the NR7 day, the stock opened at 76.50; the stretch was 0.48. In this case, the stock made a low of 75.98 (0.52 below the open) in the first few minutes, which would have triggered a short sale if we did not use the ORBP rule to trade with the trend.
The long-entry stop was 76.98, which was hit later in the morning. The stock closed at 79.35 for a profit of 2.37 that day, not including slippage. This open profit warranted holding the position overnight.
The next day, the stretch is used as a trailing stop, based on the opening price (79.35). The stretch had increased to 0.53, making the stop level 78.82 (79.35-.53), which was not hit. The next day, the stock opened at 81.56. Subtracting the
stretch (0.53) sets a new stop at 81.03, the approximate level at which the trade would have been stopped out.
Bar C is the combination IDnr4 and NR7 bar. Still trading from the long side, the market opened the next day at 81.90.
Adding the current stretch of 0.53 creat-ed an entry stop of 82.43. But because the high was 82.00 on this day, no long trade was executed.
As an example of what would happen taking the trade against the trend, sub-tracting 0.53 from the opening of 81.90 would have put you short at 81.37. The stock closed at 81.00, which would have resulted in a small profit if you exited at the close. If you stayed short, however, expecting some follow-through pro f i t
taking, you would have been stopped out at 81.48 (using the stretch the follow-ing day to determine the stop-loss).
Profit targets
One way to take partial profits is to use a percentage of the 10-day moving aver-age of the daily ranges as a target. Figure 4 (left) compares the 10-day average of the daily ranges compared to the stretch amounts. The average daily range is 2.55, but it ranges from just above 1.50 to just over 3.50. A reasonable target is 66-percent of the current 10-day moving average, just to be sure to put away some partial profits when you have the chance.
For example, at the bar after A in F i g u re 3, the current 10-day moving average of the range was 2.78. Assuming that once you are stopped into the long position you are confident the low at 71.19 is in place for the day, add 66 per-cent of 2.78 (1.85) to 71.19 for a target of 73.04. This would have given you partial profits of 0.98 on this day before slip-page, which offsets the loss taken had you held the position at the close.
In addition, had you traded against the trend after the bar C trigger, you would have been short at 81.37. The 10-day moving average of the daily ranges had increased to 3.06, so the targ e t would have been the high of 82.33 – 2.04
= 80.31 (3.06 * 0.666 = 2.04), which would have been reached.
Finally, once in a trade, consider mov-ing your stop to breakeven if the market has reached a point that represents 50 percent of the 10-day average of the daily range.
Be a specialist
Avery important aspect of applying this kind of pattern-based technique is your ability to execute trades with as little slippage as possible. Identifying these types of price patterns, and combining them with rules for entering, managing risk and taking profits in various mar-kets amounts to specializing. And spe-cialization is as popular and pro f i t a b l e an endeavor in trading as it is in other d i s c i p l i n e s .
Ý
42 www.activetradermag.com • April 2003 • ACTIVE TRADER 10-day MA of the daily ra n g e s
To increase the odds of profitability, you can take partial profits when price moves in your direction by 66 percent of the 10-day average daily range.
FIGURE 4 DETERMINING LOGICAL TARGETS
BY THOM HARTLE
W
hen analyzing theb road market, many traders consult vol-ume to confirm price moves. Total volume is most often the subject of this analysis, but comparisons of up volume (total volume in stocks that are up on the day) and down
vol-ume (total volvol-ume in stocks that are down for the day) can provide addition-al insight into market behavior.
Typically, if up volume is greater than down volume, the market will be up on the day, and vice versa. Figure 1 (left) shows an example of the relationship between daily up and down volume.
The top half of the chart is the S&P 500, and the bottom is the difference between up volume and down vol-ume. When the S&P closed up, the difference between up volume and down volume was positive; on days the market closed down, the differ-ence was negative.
General volume characteristics The battle between up volume and down volume is similar to a car race in which one car is running at top speed and the other is sputtering along. When traders and investors are very bullish, they are buying more — or more aggressively — than they are selling. Up volume is greater re l a t i v e to down volume, and the market advances. If traders and investors are bearish, the opposite is true. During periods when buyers and sellers are balanced, the up and down volume statistics will be closely matched and a trading range will unfold.
An intraday view of two days — one where the bulls dominate and one where the bears are in charge — offers additional perspective on the interplay of up and down volume.
43 www.activetradermag.com • May 2003 • ACTIVE TRADER S&P 500 (SPX), five-minute
Up volume - down volume
7 14 21 28 1 4 11 18 25 2
Nov. Dec.
9 5 0 . 0 0 9 2 5 . 0 0 9 0 0 . 0 0 8 7 5 . 0 0 8 5 0 . 0 0 8 2 5 . 0 0 8 0 0 . 0 0 7 7 5 . 0 0 1 5 , 0 0 0 1 0 , 0 0 0 5 , 0 0 0 0 - 5 , 0 0 0 - 1 0 , 0 0 0 Up volume reflects how much trading is occurring in stocks that are trading up for the day; down volume is the opposite. This bottom part of the chart plots up volume minus down volume. Up volume was usually higher on days the market closed up, and vice versa.
FIGURE 1 UP AND DOWN VOLUME
Source: CQGNet