Tradeable price patterns

Stocks & Commodities V. 7:8 (241-242): Tradeable price patterns by Kent Calhoun

Tradeable price patterns by Kent Calhoun

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hat if you knew tomorrow had an 85% probability of closing higher. Do you think it w w would be

possible to find a way to make money? Such patterns do exist in the markets all the time, but go unnoticed because traders do not know how to find them. You can estimate the probabilities associated with any particular pattern of daily closes. Use a computer with your current data or manually tabulate closing prices from, say, The Wall Street Journal or Investor's Daily . First, Monday's close is always assigned a value of X whether it is up or down from Friday's close. For each day that loses in the same direction as the Friday-to-Monday close, an X is used. For each close in the opposite direction record an O. Thus, if Friday-to-Monday was up, Monday-to-Tuesday is up, and Tuesday-to-Wednesday is down, your pattern will look like: XXO Next, all the possible patterns should be arranged on a grid like Figure 1, which is a summary of weekly cattle patterns for the period January 1977 to January 1984. To read the chart, start on the left with the first XO combination. In this study, XO (a Monday up and Tuesday down) occurred 55% of the time. Subsequently, an XO was followed by an up (XOX) 50% of the time and a down (XOO) 50%. Thus the combination XO had an exactly even chance of going up or down on Wednesday—not a tradeable edge. More useful is the knowledge that an XX was followed by a down day 57% of the time. However, even

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Stocks & Commodities V. 7:8 (241-242): Tradeable price patterns by Kent Calhoun

57% is probably not a tradeable edge. The best available edge is XOOO and XXXO, both of which are followed by a decline on Friday 61% of the time. To replicate the study on your tradable merely tabulate the number of closes by each appropriate pattern. Then compute the percentages as proportions of the total number of trades from the previous fork in the table. Sometimes, these patterns can be quite striking. A nine-year soybean pattern showed that if Monday was up (X), Tuesday was up (X), and Wednesday was down (O), then Thursday was up 72% of the time. One CME meat contract that was up Monday, Tuesday, Wednesday and down Thursday (XXXO) would close higher on Friday 85% of the time. A bull market in meats revealed if Monday was down from Friday, Tuesday would be up 75 % of the time and Wednesday would be up 83% of the time. In other words, a Tuesday intraday correction in a bull market was a buying opportunity for a higher close. A derivative of the daily patterns study is the sixth-day-down probability. A study conducted from 1977 to 1983 asked whether the day after any given five-day pattern would be down or not. It allowed any day to close negatively, patterns could begin with a minus sign (an "O" in the previous study) instead of a plus sign. As in the previous study, many patterns were unusable, but some hold promise (Figure 2). Given the computer power available to today's traders, studying patterns shouldn't be difficult. Surprisingly, this simple methodology often shows tradeable results. Kent Calhoun is a commodity trading consultant now writing a commodity trading course and a book, Eight $10,000 Trading Systems,1121 N. Main, # 19, Cedar City UT 84720.

References

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Stocks & Commodities V. 7:8 (241-242): Tradeable price patterns by Kent Calhoun

References Kaufman, Perry [1987], "The New Commodity Trading Systems and Methods," John Wiley & Sons: New York. Swing Trader software, CTCR Products, 1731 Howell Ave., Suite 149, Sacramento. CA 95825, (916) 677-7562.

FIGURE 1:The New Commodity Trading Systems and Methods, Perry Kaufman, copyright © l987, John Wiley & Sons Inc., reprinted by permission of John Wiley & Sons Inc.

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Stocks & Commodities V. 7:8 (241-242): Tradeable price patterns by Kent Calhoun

FIGURE 2:

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