Price pattern studies [Part 1]

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Stocks & Commodities V. 7:9 (288-291): Price pattern studies Part 1 by Toby Crabel

Price pattern studies Part 1 by Toby Crabel

D

o prices tend to move consistently in one direction from open to close, given the previous day's price

pattern, and do these patterns of intraday bias lend themselves to profitable trading systems? To answer these questions, I have tested all possible two-, three-, four- and five-day open-to-close patterns for the T-bond futures market from 1978 to 1987. My intention is to provide objective statistical data that can be used as a reference in trading. The price patterns in Figure 1 are referred to as "systems" because the custom software I used is system-oriented. The "+" sign in the "Pattern" column indicates an up close relative to the previous day's close; the "-" sign represents a down close. The exception is the last "+" or "-" sign in the sequence which represents the opening of that day and the point of entry for the trade. The "% Profits" column in Figure 1 determines whether intraday bias exists, and the "Total Profit" column, calculated before commission and slippage, describes whether this system is profitable on the buy or sell side. Each trade entry is on the open (shown as the last "+" or "-" sign in the pattern) and trade exit is on the close. No stops were used in the tests. I conclude that useful biases do exist from open to close as evidenced by many patterns producing 60% or better results. Patterns

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Stocks & Commodities V. 7:9 (288-291): Price pattern studies Part 1 by Toby Crabel

To explain the relationship of chart and system patterns, refer to System 5 in Figure 1 and the first bar chart pattern in Figure 2. The bar chart pattern is two lower closes with a lower open. This is represented by three minus signs (---) in System 5's "Pattern" column.

I have observed that the best profits in this pattern come mainly in strong uptrends. In trading ranges it is not as profitable. In Figure 2, beginning from left and working to right, the first pattern shows a daily price bar with the closing price marked. Immediately to the right of this daily bar is the next day's close (lower), which is the first minus sign in System 5. The next dash also is a lower close than the previous day and is the second minus sign in System 5. The last minus sign in the (---) pattern is the X which represents the open on the day of the trade. In summary, you have a lower close relative to the previous day followed by another lower close, followed by a lower open. In this case, a long position was taken on the open of the third day and exited on the close of the third day. To further explain how to interpret the data, Figure 3 lists the dates of entry on all possible buys after two lower closings and a lower open (System 5) and all sales after two higher closings and a higher open (System 12). On the chart, itself, a dash on the left of each daily bar shows the open (entry). The dash on the right of the bar is the close (exit). This Eurodollar chart is used in place of T-bonds to display an actual day session open because the chart service I use shows T-bond night session opens on the daily bar chart and this study should be used in conjunction with day session opens only. Trading the systems Regarding the systems, gross profits are high enough on some to warrant a mechanical trade, however, that is not the best application. Better systems do exist and I recommend further research using the most profitable patterns as the focus of the research. Patterns 5, 9, 12, 13, 21, 24, 25, 29, 30, 33, 36, 44, 45, 52 and 53 will provide a good start in system development. Practical trading applications are to coordinate the patterns with support/resistance, angles and trendlines. An open on an important angle of support when a strong upward bias is indicated increases validity of support. Watch action around the open for confirmation of the bias before entering a trade. Another application is to place stops to enter just above or below the open in the direction of the opening range breakout bias (see "Playing the Opening Range Breakout," Stocks & Commodities, Volume 6: Market Timing). This should be done early in the session to anticipate early (urgent) entry on the part of market participants. Early breakout entry usually results in a big move for the day. The patterns also can be used to enter when a trend has been defined. Take pattern 48 — a buy after three up days, a lower day and a lower open — which reflects a strong up market with a one-day counter move. The lower open provides an excellent chance for low-risk entry. The objective is new highs for the move. Note the high percentage profit (63%). I have observed that the best profits in this pattern come mainly in strong uptrends. In trading ranges, the patterns aren't as profitable. I do not use these systems methodically in my trading, but find them a useful starting point in system development. Increasing or narrowing daily ranges can be applied successfully to the basic close/open

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Stocks & Commodities V. 7:9 (288-291): Price pattern studies Part 1 by Toby Crabel

patterns to form some reliable systems. In fact, daily range differences relative to the previous day or days may be one of the most useful approaches I've found. Toby Crabel is a CTA and AP with RB&H Commodities and a principal in Toby Crabel & Associates. A former trader at the CME and CBOT, he now edits Market Analytics, 30 S. Wacker Dr., Suite 1912, Chicago, IL 60606, (800) 621-2503, ext. 1410.

References Crabel, Toby [1988], "Opening Range Breakout, " Stocks & Commodities, Volume 6: Market Timing , pp. 337, 366, 462. Crabel, Toby [1989], "Opening Range Breakout," Stocks & Commodities, April-July.

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Stocks & Commodities V. 7:9 (288-291): Price pattern studies Part 1 by Toby Crabel

FIGURE 1:

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Stocks & Commodities V. 7:9 (288-291): Price pattern studies Part 1 by Toby Crabel

FIGURE 2: A lower close on day 2, followed by another lower close and then a lower open creates a --pattern. To the right is the same pattern as it would appear on a conventional bar chart.

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Stocks & Commodities V. 7:9 (288-291): Price pattern studies Part 1 by Toby Crabel

FIGURE 3:

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