The phrase “the trend is your friend” is well-known among traders and investors. However, determining what constitutes a pattern can be difficult since it is dependent on the trader’s chosen time in the market. A trader must also assess the intensity of a pattern once it has been detected. Mark Fisher outlines a variety of strategies in his book “The Logical Trader” to help his reader spot trend breakouts and determine their power. Fisher’s ACD trading system finds trades by analyzing intraday data to determine the daily opening range. Fisher is the founder of MBF Clearing Corp., one of the largest clearing firms on the NYMEX. He is an independent trader.
Although this intraday ACD technique may not be appealing to long-term traders or investors, the following section examines how the technique can be extended over a longer time frame. Mark Fisher, a trading guru, isn’t your typical market participant. Use the method he teaches to make a living on the New York markets every day. His traders brave the commodity pits or work from computer terminals to trade everything from simple commodities like natural gas and crude oil to volatile stocks. Is it effective? Simply ask someone at Fisher’s firm about the method, and they’ll tell you it works.
In his book “The Logical Trader,” Fisher explains his ACD method and how it works. Unlike many others in the business of assisting traders, he is eager to share the device he employs because he feels that the more people can use it, the more powerful it will become. His scheme essentially provides A and C points for trade entry and B and D points for trade exit, hence the term. In his book, he often uses natural gas and crude oil as examples, but he also mentions sugar and a variety of stocks. These examples provide useful insight into the types of markets where the ACD can be beneficial. The opening range (OR) (blue lines) is measured using the range of the first 15 minutes of the trading day in the S&P 500 Index five-minute table, which displays the first ten trading days of qMar 2004 with ACD signals. When the index breaks three points above the opening range, an A up (red line) occurs. When the price breaks a certain amount below the opening range and remains there, it is called a down (red line). It’s worth noting that a tool like the relative strength index will also assist in the confirmation of buying and selling signals. If the index puts in an A up and then breaks down below the opening range, the trader will reverse his or her stance when the index puts in a C down, 0.5 points below the low of the opening range.
First, we’ll look at how to join short-term trades on a five-minute map. We assess the opening range (OR) high and low using the first five to thirty minutes of the day, depending on the equity or product. The number of points above or below the daily OR is then used to measure “A ups” and “A downs.” If the stock price moves $0.27 above (or below) the OR, an A up (A down) (green lines) occurs.
Monthly and Half-Yearly Opening Range
The concept of opening range can also be extended to longer periods of time. Just as the daily OR has a higher chance of being the high or low for the next 20 or so trading days than other periods during the day, the monthly OR has a higher chance of being the high or low for the next 20 or so trading days than any day in the month. Once a trader is aware of this reality, he or she may use it to improve his or her chances of making money.
This is also valid for the first two weeks of each six-month cycle (10 trading days). The high and low points set in the first two weeks of January and July often serve as a key area of support or resistance for the next five and a half months. The good news is that ORs are simple to measure both monthly and half-yearly. Simply draw two lines around the chart using the high and low of the first trading day of the month for the monthly OR. A bullish bias is adopted if price breaks above the high. A bearish stance is taken if it breaks below the low line. The stock continued to trade lower after breaking through the monthly OR, confirming a medium-term negative market bias. The bearish divergence on the relative strength index, or RSI, given early notice of the breakdown.
A New System Has Arrived
Fisher noticed the importance of the opening range in setting the stage for the trading day when working on a trading scheme as a graduate student at the Wharton School of Business in the early 1980s. In the case of crude oil (where the opening range at the time was 10 minutes), the opening range was between 17 and 23 percent of the time the day’s high or low. As there are 32 ten-minute intervals in a trading day, if markets were completely random, the opening range will be the high or low 1/16 (or 6.25 percent) of the time (1/32 for high and 1/32 for low). To put it another way, the odds of the opening range being either high or low for the day are more than three times higher than they would be if market fluctuations were completely random, as the random walk hypothesis suggests. Fisher isn’t the only one who has figured this out. An opening range is used by a variety of trading systems today to include directional bias clues.
On a given day, here’s how a trader employs the ACD scheme. First, about an hour or so before the market opens, he or she watches global markets. This allows him to get a sense of what traders all over the world are up to. Following that, it is important to read commodity papers. What studies are expected to be released today that could have a significant impact on the trader’s market? For example, a crude-oil trader will monitor OPEC (Organization for Petroleum Exporting Countries) meetings for any indications of a reduction or increase in output quotas, weather reports affecting oil demand, the weekly oil inventory report, and weekly natural gas storage figures. Following the first 15 minutes of the market, which is the opening range (OR) used in the example above, the S&P 500 Index trader, . After that, the trader waits for an A up or an A down to happen. In this case, the index crosses the OR and increases three points more, resulting in an A up.
The trader sets a stop order and purchases the index at A up. A stop loss would be set below the low value of the OR (B-exit) so that if the market moved in the wrong direction for more than this amount while the trader was in it, he or she would exit – better to save the money for another day. The day trader would exit the trade near the end of the day if the trade went in the desired direction. If the A up signal is produced, but the index trades below the opening range, the AC down signal is generated. When the lower limit of the OR (B exit) is penetrated, the trader exits and reverses his or her stance (sell short) when a C down is entered. AC down (or C up) moves are much less common. They’re interesting because the later they happen in the day, the more intense the change becomes: the less time traders have to exit a trade on a reversal, the more urgent it becomes, and hence the higher the volatility. According to Fisher, remaining in a trade overnight may be a smart idea in this case, as markets often encounter gaps at the start of the next day. We see a five-minute bar chart with an opening range, an A up, and a C down. When the equity traded at the A up, the trade was entered, and when it traded below the B exit at the bottom of the opening range, it was exited (stopped out). If the index closes above the upper limit of the opening range, a C down trade was entered with a stop (D exit).
If the A up signal is produced, but the index trades below the opening range, the AC down signal is generated. When the lower limit of the OR (B exit) is penetrated, the trader exits and reverses his or her stance (sell short) when a C down is entered. C down (or C up) moves are much less common. They’re interesting because the later they happen in the day, the more intense the change becomes: the less time traders have to exit a trade on a reversal, the more urgent it becomes, and hence the higher the volatility. According to Fisher, remaining in a trade overnight may be a smart idea in this case, as markets often encounter gaps at the start of the next day.
Select a Time Frame
The ACD system’s beauty is that it can operate in almost any time frame. A day trader might base his or her trading on a five-minute cycle, whereas a longer-term trader might use regular data. Fisher explains the macro ACD from a longer perspective. This still necessitates the use of intraday data to assess the opening range and whether A is up or down, among other things. The difference now is that the longer-term trader holds a running total of the score per day. Based on business activity, Fisher assigns regular values. For example, if the equity opens with an A and never trades below the opening range, the day will receive a score of +2. He gives it a –2 if it puts in an A down and never closes above OR. His regular scale ranges from +4 to –4 on a scale of one to four. Every day, a new daily value is added to the number, while the oldest score from 30 days ago is removed. A longer-term trader would consider a day in which the running tally is rising bullish. The more quickly the value rises or falls, the more bullish or bearish the signal becomes.
This article will not go into detail about this technique, but suffice it to say that Fisher has found it to be very effective in providing his traders with a macro view of the market in which they trade. Those who want to learn more should get a copy of “The Logical Trader” or visit Fisher’s website. He has a subscription service for those who want to receive daily updates on the values of A and C points on different stocks and commodities, as well as tips on how to use his method effectively.
The principles mentioned here are just a sliver of how the ACD method operates, so do more reading and homework before using it. The scheme isn’t a one-size-fits-all trading technique that can be applied to any equity. Highly volatile, very liquid (large daily trading volume), and subject to long trends are the best equities for ACD – currencies appear to fit well with the ACD system. Keep in mind that, although we used the Sample 500 Index in our example, Fisher stated in a telephone interview that the index does not perform well and that he believes there are much better candidates for trading with the ACD. It’s also worth noting that it doesn’t work well on low-volatility stocks that are trapped in a trading range. If you’re searching for fresh and exciting trading ideas and aren’t afraid to put in any effort, the ACD framework provides another perspective on markets as well as a means of profiting from regular volatility and developments in stocks, commodities, and currencies.