Quick ACD trading strategy question

[Bernoulli]

Quote from Sponger:

Bernoulli and Maverick74, can you elaborate a little here- I am trying to incorporate the ideas into a trading methodology.

You are saying it didn't backtest, yet you use the concepts as the basis for a trading strategy.

Bernoulli, are you saying that you use an opening range breakout strategy?

. . .

Hope you don't mind enlightening me here, I am seriously studying Fisher's method, and I don't want to see something that isn't there, or make more of it when it isn't substantiated.

Thanks in advance for any feedback!

Sponger - My recollection of ACD is that Fisher set up a break out boundary that was a point or two outside the (for example) 10-minute OR. (I might be wrong on the details; I read the book a few years ago.) My comments pertain to the stock indexes. Most of the time the price in the first half hour will trade through the open price a few times and after the first half hour make a move out of one side of the OR and then retrace itself partially. (About 80% of the the NYSE stocks are open by 9:38 and it usually takes another 10-20 minutes for the opening orders to be digested.) I want to enter on the retracement as that is a lower risk entry then entering at the breakout.

A smaller proportion of the time the opening price will trade only a few times in the first few minutes before the market moves quickly away from the open. Days like this are more likely to be trend days so I would probably trade a breakout.

 

[Maverick74]

Quote from Sponger:



Maverick74, care to explain what you mean a little further by you broke it down and re-engineered?

Well for starters, the method Fisher outlined in his book, "The Logical Trader" is just a foundation of ACD. It's not a strategy. It was never meant to be read, copied and traded. In fact, he told me himself if anyone read the book and traded that way, they would get killed.

Also, the method laid out in the book focuses more on commodity markets, in particular energy markets. These markets are very volatile and tend to work better with the examples he gave in his book. If you took his method and tried to trade the index futures with it, I would say you would be out of money in two months.

So what we did, was take the "logic" of his system and his rules and apply them specifically to index futures. In fact, the funny thing is if you took our method and applied it to energy markets or currencies or other commodity products, you would get killed. Well, maybe not killed, but certainly would not be as effective.

I put a lot of work into creating this modified ACD for the indices and I have to say it's quite robust. Of course I'm very biased but I don't think there is a better methodology out there. I incorporated it with an option traders mentality and used everything I learned tape reading listed equities.

But like the old saying goes, the proof is in the pudding. The only thing that matters at the end of the day is results.

 

[Sponger]

Thank you both for responding!

Bernoulli:

Q) What timeframe would you recommend as the OR on stock indices - I've been using 30 minutes, and it appears to be too long - I have seen whole days trade within that timeframe.

Q) Would you recommend always using the same OR timeframe - or change it based on the volatility of the market?

Q) Any advice on fading the OR high or low, vs. trading the breakout of the OR - are there any TA indicators that I should consider as an overlay on the OR?

Q) Any other books/educational sources of OR breakout trading strategies you would recommend?

Maverick74:

Ok, you really lost me with Fisher's admission: that he wrote a book about a trading methodology - but that if anyone traded that way, they would lose. Is that what you are saying?

Q) Are you saying that OR breakout strategy wasn't working for a long time due to low volatility in the stock indices - whereas commodities are, for the most part, volatile?

Q) Without divulging your work, can you elaborate on what inputs/variables of the stock indices make them unique vs. trading commodities - regarding why you can't trade commodities the same way>

Sincere thanks for the further education - Sponger

 

[Maverick74]

Quote from Sponger:

Thank you both for responding!

Maverick74:

Ok, you really lost me with Fisher's admission: that he wrote a book about a trading methodology - but that if anyone traded that way, they would lose. Is that what you are saying?

Q) Are you saying that OR breakout strategy wasn't working for a long time due to low volatility in the stock indices - whereas commodities are, for the most part, volatile?

Q) Without divulging your work, can you elaborate on what inputs/variables of the stock indices make them unique vs. trading commodities - regarding why you can't trade commodities the same way>

Sincere thanks for the further education - Sponger

Yes, Fisher explained to me that the book was not meant to be taken as an exact blueprint to trade but rather as a foundation for building a strategy around it. If you read the book, that makes perfect sense.

OR breakouts can work in any product. The problem with the indices was the lack of follow through and volatility. We fixed that so it's not an issue for us.

What makes stock indices unique is that they have underlying components inside of them. This makes them harder to manipulate and harder to swing them from lows to highs and back to lows. It's very hard to do that in the index futures or any product that carries underlying components. Crude oil and nat gas for example do not fit that category.

 

[Sponger]

Thanks for the clarification Maverick74!

 

[chud]

Quote from Maverick74:


OR breakouts can work in any product. The problem with the indices was the lack of follow through and volatility. We fixed that so it's not an issue for us.

I wonder how Maverick has made lack of followthru a non-issue. Fading the breakouts? Or just buying pullbacks above opening range and vice versa?

I'm trying to build an ACD system also Sponger. Let me know if you have some good ideas.

 

[Sponger]

I agree with your points - false breakouts have to be dealt with, and fading breakouts and entering on pullbacks have to be considered as part of the strategy.

Putting that into a mechanical system is where I am right now -I'm just getting into the whole "create a mechanical system" thing, but I really like the OR and breakouts combined.

As far as the breakout signal, there has to be some qualifier to it that makes sense as a hard rule ie. a % move above OR, % move greater than daily range, etc. Several systems exist with rules along these lines, and they don't rely on any "proprietary numbers".

Again, I'm just getting into this, so I would appreciate any feedback Chud, or anyone else reading

 

[Maverick74]

Quote from chud:

I wonder how Maverick has made lack of followthru a non-issue. Fading the breakouts? Or just buying pullbacks above opening range and vice versa?

I'm trying to build an ACD system also Sponger. Let me know if you have some good ideas.

Our system trades as many fades as it does breakouts and in some cases both. There are many ways to handle the lack of follow through.