The ACD Method

[Maverick74]

Quote from acdtrader:

Maverick74 - agree with what you have to say. The OR stop is too wide. However here is my thought process, and please feel free to critique what you think.

Let say: Lets say the OR is high / low of the day -> 30% of the time and every time I bet in the direction of the OR breakout, lets say I win $5. On the other hand, 70% of the time trades are either flat or I get stopped out and lose $2 in those stopped out trades.

Hence my expectancy on this trade over a long period of time would be: 0.3 X $5 + 0.7 X (-2) = $0.1 (lets ignore trading costs for now)

Its a very small edge, but If I could make this bet 1 million times across similar instruments that exhibit this property where the OR is significantly the high/low of the day than days when its not - that would be a good risk reward system.

Not to forget, we can factor in other conditions such as + / - days, number line etc that might increase the expectancy.

Hence - delving into the OR stats.

Currently I use a factor of volatility to put out my stops, sometimes its below the OR low and sometimes above the low for long trades. Its different from how Fisher teaches in the book, but in my experience - when the stops are too tight, one gets stopped out and if they are too wide, you are taking a lot of failed Aups thinking of them as AUp breakouts. Thats where your experience as a trader comes in maverick (which is what you have focused on sharing throughout the blog talking about how the ACD methodology vs a set of rules that one programs) - machines cant think, but they are very disciplined.

I think a better study would be to look at the number of times a confirmed A up or confirmed A down closes at or near the highs or lows of the day respectively in order to calculate expectancy. The problem I have with simply testing the robustness of the OR high or low is that one can get killed getting stopped out of trades well inside the OR especially in high volatility markets.

I think what you want to test is "follow through". A while back a buddy of mine tested this on trade station and it was indeed proven that confirmed A trades at the very minimum hit the ATR a majority of the time. This gives you something to work with as you are no longer testing whether or not you will be stopped out but whether or not the trade actually has "follow through" to the ATR.

The other benefit this study has it that it negates the importance of OR time frames since what we are testing is follow through to the ATR, we no longer need to worry whether one uses a 5 min or a 30 min OR as the ATR level should be constant. This keeps things much more clean.

 

[Maverick74]

Copper down about 5% today. FXI down 6%. They continue to get solder harder then ES.

 

[Maverick74]

Quote from Maverick74:

I'm going to start pounding the table on another trade here. That trade is live cattle. Live cattle is in a huge bull market. It's a quiet trade that very few people are talking about. It's above my monthly and QTR A up and confirmed a weekly A up today. Many fundamental guys are saying 165 as a minimum price target.

Just wanted to update a previous "pound the table" trade. Live Cattle continues to break out. Note that we rolled over to the active Dec contract from the Sept in the previous post.

 

[Maverick74]

Here is the end of month snap shot. The only real strength this month came from the cattle and us dollar markets.

 

[Shanb]

Quote from acdtrader:

Maverick74 - agree with what you have to say. The OR stop is too wide. However here is my thought process, and please feel free to critique what you think.

Let say: Lets say the OR is high / low of the day -> 30% of the time and every time I bet in the direction of the OR breakout, lets say I win $5. On the other hand, 70% of the time trades are either flat or I get stopped out and lose $2 in those stopped out trades.

Hence my expectancy on this trade over a long period of time would be: 0.3 X $5 + 0.7 X (-2) = $0.1 (lets ignore trading costs for now)

Its a very small edge, but If I could make this bet 1 million times across similar instruments that exhibit this property where the OR is significantly the high/low of the day than days when its not - that would be a good risk reward system.

Not to forget, we can factor in other conditions such as + / - days, number line etc that might increase the expectancy.

Hence - delving into the OR stats.

Currently I use a factor of volatility to put out my stops, sometimes its below the OR low and sometimes above the low for long trades. Its different from how Fisher teaches in the book, but in my experience - when the stops are too tight, one gets stopped out and if they are too wide, you are taking a lot of failed Aups thinking of them as AUp breakouts. Thats where your experience as a trader comes in maverick (which is what you have focused on sharing throughout the blog talking about how the ACD methodology vs a set of rules that one programs) - machines cant think, but they are very disciplined.

If you don't mind, how do you come up with your stops?

 

[Shanb]

So I've been using ACD for the past few weeks and one thing I am finding is that I have certain strengths when it come to trading and certain weaknesses. I can hold onto trades and let my winners run and add to positions when necessary. I am not the best with my entries and stop placement. I have been using the Pivot range and 3 day rolling pivots for stop placement and I am having some trouble with this method. Many times a stock will shake out through a pivot range low high or even go inside of it to a certain extent. Many times I get shaken out of great trades because of this.

Here's an example of a trade in JWN today. Tested the pivot(just below the A-level) early in the day and then it comes for a second test. Put the stop above the pivot with some cushion. Tested it and went through, wasn't stopped out yet Comes up for one more test and goes through that high!

Any ideas here? I was thinking of using a volatility based stop. One idea was to use time as the tool for this. If I will give this setup 20 mintues to work then to use 1/18 of the ATR(20 min time periods per day) and then putt that behind the pivot this type of trade..

For an A-up/down. Use 1/9 of the ATR which is based on 40 minute time periods(twice the opening range).

What do you guys think?

 

[Maverick74]

Quote from Shanb:

So I've been using ACD for the past few weeks and one thing I am finding is that I have certain strengths when it come to trading and certain weaknesses. I can hold onto trades and let my winners run and add to positions when necessary. I am not the best with my entries and stop placement. I have been using the Pivot range and 3 day rolling pivots for stop placement and I am having some trouble with this method. Many times a stock will shake out through a pivot range low high or even go inside of it to a certain extent. Many times I get shaken out of great trades because of this.

Here's an example of a trade in JWN today. Tested the pivot(just below the A-level) early in the day and then it comes for a second test. Put the stop above the pivot with some cushion. Tested it and went through, wasn't stopped out yet Comes up for one more test and goes through that high!

Any ideas here? I was thinking of using a volatility based stop. One idea was to use time as the tool for this. If I will give this setup 20 mintues to work then to use 1/18 of the ATR(20 min time periods per day) and then putt that behind the pivot this type of trade..

For an A-up/down. Use 1/9 of the ATR which is based on 40 minute time periods(twice the opening range).

What do you guys think?

Shan, on my levels, JWN had a perfect failed A up right into the pivot. Your levels are a little lower then mine but let me offer some advice here. This is really really important. First my usual disclaimer, this is only my opinion. But A levels are NOT to be used as support or resistance levels. That's just not what they are. The fade trade is just that, it's a fade. It's not a fade because there are sellers waiting there, it's a fade because that is the point where volatility is getting over extended.

The way you want to play fade trades is by taking only the FIRST fade. Don't keep selling the market every time it goes up there. In my experience, the fade works best the first time. After that, every time price trades back to that level, it's telling me it wants to go through it. That does NOT mean it's going to confirm and go to the moon, but simply at the very least it's going to run stops.

So the highest percentage trade is that first fade because there are no stops there yet. It's also the only time where price is truly over extended. Once it comes off that level it now has a chance to find real buyers who are going to try to take it higher. I would not want to sell into that.

So to summarize, your chart looks fine. That first fade was good, but you then want to leave it alone and wait for it to confirm. The whole idea behind ACD is less is more. You should not be taking 15 trades a day in the same product. You should take maybe 2. One attempt at a fade and then going with the momentum on a confirmed breakout.

All this is just my opinion and I'm often wrong. Keep that in mind.

 

[kinggyppo]

Shan b, I will throw in my 2 cents, where to begin. Ok lets say you have to train someone who is completely new to trading. This is great he says, an atm that pays me everyday. No you tell him, you are gonna get stopped out alot and be wrong all the friggin time. What? you mean the mkt is not an atm machine, shit then how should I proceed? With caution you say.

Now let's get to trading for real. You and I and even Mav have limited time, capital and even more limited trading opportunities. As a day trader you want to trade what is moving. Looking at this particular stock, I would say not much going on. Basically the stock chopped between the pivot and s1 (support using the floor trader pivots, see my pivots.com if you don't know what I am talking about). So how much realistically could you have taken out of the stock. Like Mav says you need to trade the best products, those that are trending or moving. For example you could scan the stocks that gapped up or down the most, as these are the stocks most likely to move one way or another. In the larger sense there are really only two trades a breakout and a reversion trade. breakout is when the stock wants to keep going higher or lower, the trademark here is it keeps exceeding the daily high/low, conversely reversion to the mean is characterized by chop moving back and forth in a range, the algos, robots. This is why you will get killed trading different time frames. I would fire immediately any trader who thought it was cute to experiment with different time frames, the reason being is that a breakout trade can be a reversion to the mean trade on a different time frame. To add further confusion, I could show a day on spy where all you had to do is set a .20 cent stop and collect your money at the end of the day. Other days you get chopped like mad and can't make a dime, this is part of the game and it is aggravating as hell. So pick a frame and become the master of it whether its 1 minute or monthly, hope this helps

 

[Shanb]

Quote from Maverick74:

Shan, on my levels, JWN had a perfect failed A up right into the pivot. Your levels are a little lower then mine but let me offer some advice here. This is really really important. First my usual disclaimer, this is only my opinion. But A levels are NOT to be used as support or resistance levels. That's just not what they are. The fade trade is just that, it's a fade. It's not a fade because there are sellers waiting there, it's a fade because that is the point where volatility is getting over extended.

The way you want to play fade trades is by taking only the FIRST fade. Don't keep selling the market every time it goes up there. In my experience, the fade works best the first time. After that, every time price trades back to that level, it's telling me it wants to go through it. That does NOT mean it's going to confirm and go to the moon, but simply at the very least it's going to run stops.

So the highest percentage trade is that first fade because there are no stops there yet. It's also the only time where price is truly over extended. Once it comes off that level it now has a chance to find real buyers who are going to try to take it higher. I would not want to sell into that.

So to summarize, your chart looks fine. That first fade was good, but you then want to leave it alone and wait for it to confirm. The whole idea behind ACD is less is more. You should not be taking 15 trades a day in the same product. You should take maybe 2. One attempt at a fade and then going with the momentum on a confirmed breakout.

All this is just my opinion and I'm often wrong. Keep that in mind.

Thanks John. One of my main problems is that I am taking alot more than two trades in every instrument. For example on an a fade trade I might try to position for a fade...stopped out...try again...stopped out and then on the third attempt I will catch the move. But I am using them on the following attempts and getting caught in the stop runs.

I need to really wrap my head around keeping it simple and trading less! ACD is great in that it keeps you from overtrading, need to beat this into my head lol.

 

[Shanb]

Quote from kinggyppo:

Shan b, I will throw in my 2 cents, where to begin. Ok lets say you have to train someone who is completely new to trading. This is great he says, an atm that pays me everyday. No you tell him, you are gonna get stopped out alot and be wrong all the friggin time. What? you mean the mkt is not an atm machine, shit then how should I proceed? With caution you say.

Now let's get to trading for real. You and I and even Mav have limited time, capital and even more limited trading opportunities. As a day trader you want to trade what is moving. Looking at this particular stock, I would say not much going on. Basically the stock chopped between the pivot and s1 (support using the floor trader pivots, see my pivots.com if you don't know what I am talking about). So how much realistically could you have taken out of the stock. Like Mav says you need to trade the best products, those that are trending or moving. For example you could scan the stocks that gapped up or down the most, as these are the stocks most likely to move one way or another. In the larger sense there are really only two trades a breakout and a reversion trade. breakout is when the stock wants to keep going higher or lower, the trademark here is it keeps exceeding the daily high/low, conversely reversion to the mean is characterized by chop moving back and forth in a range, the algos, robots. This is why you will get killed trading different time frames. I would fire immediately any trader who thought it was cute to experiment with different time frames, the reason being is that a breakout trade can be a reversion to the mean trade on a different time frame. To add further confusion, I could show a day on spy where all you had to do is set a .20 cent stop and collect your money at the end of the day. Other days you get chopped like mad and can't make a dime, this is part of the game and it is aggravating as hell. So pick a frame and become the master of it whether its 1 minute or monthly, hope this helps

Since I've now had a decent amount of time with ACD, I am really starting to understand what it is about. I've been trading small size and looking for the good R:R setups, but haven't outlined a plan and figured out exactly how to employ it(product selection, breakouts etc.)

One good thing about trading stocks is that there are thousands of products on a daily basis that trade, some have strong breakouts, some chop etc. You get a little bit of everything. Using ACD and looking for A-up and A-down breaks is a very simple idea. Simply looking for momentum and range expansion. Filter it with trading with the macro trend, volatility(small/large pivots), and you can have a good approach.

So what other types of parameters would you be searching for good stock candidates. You mentioned gaps. What about targets? ATR seems like a good candidate but simple discretion could probably let those runners go as price action dictates.

Thanks for your insight BTW