October 2008 • Volume 2, No. 10
FUTURES: System trading with the %C filter p. 10
T-BOND seasonals
p. 9
SHORT-TERM calendar spreads p. 15 FUTURES SYSTEM LAB: Bottom-catcher
p. 26
THE MARKET’S stress test p. 36 FUTURES BASICS: Commodity sectors p. 32 RATIO SPREADS vs. BACK SPREADS p. 20
CONTENTS
Backspreads and ratio spreads . . . . . . .20 These spreads aren’t for every trader, but their unique structure can capture large profits from big, sudden moves in the underlying market. By Frederic Ruffy
Futures Trading System Lab “Nerves of steel” pullback system . . . . . .26 Examining a stock-index futures pullback system reveals the potential pitfalls behind some of the attractive performance statistics. By FOT Staff
Options Trading System Lab Trading credit spreads with the CCI . . . . .30 Historical analysis of an option system
Contributors . . . . . . . . . . . . . . . . . . . . . . . . . . .5
triggered by the Commodity Channel Index. By Steve Lentz and Jim Graham
Market Movers . . . . . . . . . . . . . . . . . . . . . . . .6 A roundup of price action in the different futures sectors.
Trading Strategies Seasonal T-bond patterns . . . . . . . . . . . . .9 Analysis reveals long-term and short-term tendencies in T-bond futures that show surprising consistency over time. By Jay Kaeppel
System filtering with %C . . . . . . . . . . . . .10 The %C indicator is designed to show when the market shifts from a trading range to a trending environment. See what happens when it’s combined with a volatility breakout system. By Jack F. Cahn, CMT
Trading Basics Futures sectors . . . . . . . . . . . . . . . . . . . . . . .32 A look at the sub-groups that make up the futures market. By FOT Staff
Trader Interview Bill Greenwalt . . . . . . . . . . . . . . . . . . . . . . . .34 A professional option trader explains how to manage risk in today’s difficult markets. By David Bukey continued on p. 4
Short-term calendar spreads . . . . . . . . .15 Exploring the nuances of calendar spreads leads to short-term trading opportunities. By Jonathan Maher
2
October 2008 • FUTURES & OPTIONS TRADER
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IMPORTANT INFORMATION: No offer or solicitation to buy or sell securities, securities derivative or futures products of any kind, or any type of trading or investment advice, recommendation or strategy, is made, given or in any manner endorsed by TradeStation Securities, Inc. or any of its affiliates. • Past performance, whether actual or indicated by historical tests of strategies, is no guarantee of future performance or success. • Active trading is generally not appropriate for someone of limited resources, limited investment or trading experience, or low-risk tolerance. • There is a risk of loss in futures trading. Options and Security Futures trading is not suitable for all investors. Please visit our Web site for relevant risk disclosures. • System access and trade placement and execution may be delayed or fail due to market volatility and volume, quote delays, system and software errors, Internet traffic, outages and other factors. • All proprietary technology in TradeStation is owned by TradeStation Technologies, Inc., an affiliate of TradeStation Securities, Inc. • Trading foreign exchange carries a high level of risk and may not be suitable for all investors. There is a possibility that you may sustain a loss equal to or greater than your entire investment; therefore, you should not invest or risk money that you cannot afford to lose. You should be aware of all risks associated with foreign exchange trading. Barron’s awards are based on a review of TradeStation’s brokerage products and services by a Barron’s journalist. Barron’s is a registered trademark of Dow Jones & Company. Leader in Rule-Based Trading tag line based on industry awards and reviews. © 2008 TradeStation Securities, Inc. All rights reserved.
CONTENTS
News Financial panic tanks markets . . . . . . . .36 Financial turmoil in late September and early October rocks markets around the world and promises to usher in a new financial era, for better or worse.
Other stories: ICE Futures takes over Russell stock index futures trading . . . . . . . . . . . . . . .38
Options Watch: Financial Sector ETF components . . . . . . . . .42 Futures & Options Calendar . . . . . . . . . . . .43
New markets: Merc launches steel and Euro-denominated S&P futures . . . . . . . . . . .39
Key Concepts . . . . . . . . . . . . . . . . . . . . . . . . . .44 References and definitions.
Futures Snapshot . . . . . . . . . . . . . . . . . . . . . .40 Momentum, volatility, and volume statistics for futures.
Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50 Options Trade Journal . . . . . . . . . . . . . . .52
Option Radar . . . . . . . . . . . . . . . . . . . . . . . . . .41 Notable volatility and volume in the options market.
Buying puts on Bank of America before the financial storm hits.
New Products and Services . . . . . . . . . . . . .53 Futures & Options Watch COT extremes . . . . . . . . . . . . . . . . . . . . . . .42 A look at the relationship between commercials and large speculators in 45 futures markets.
Have a question about something you’ve seen in Futures & Options Trader? Submit your editorial queries or comments to
[email protected].
Looking for an advertiser? Click on the company name below for a direct link to the ad in this month’s issue of Futures & Options Trader.
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October 2008 • FUTURES & OPTIONS TRADER
CONTRIBUTORS CONTRIBUTORS
A publication of Active Trader ®
For all subscriber services: www.futuresandoptionstrader.com Editor-in-chief: Mark Etzkorn
[email protected] Managing editor: Molly Flynn Goad
[email protected] Senior editor: David Bukey
[email protected] Contributing editor: Keith Schap Associate editor: Chris Peters
[email protected] Editorial assistant and Webmaster: Kesha Green
[email protected] Art director: Laura Coyle
[email protected] President: Phil Dorman
[email protected] Publisher, Ad sales East Coast and Midwest: Bob Dorman
[email protected] Ad sales West Coast and Southwest only: Allison Chee
[email protected] Classified ad sales: Mark Seger
[email protected] Volume 2, Issue 10. Futures & Options Trader is published monthly by TechInfo, Inc., 161 N. Clark Street, Suite 4915, Chicago, IL 60601. Copyright © 2008 TechInfo, Inc. All rights reserved. Information in this publication may not be stored or reproduced in any form without written permission from the publisher. The information in Futures & Options Trader magazine is intended for educational purposes only. It is not meant to recommend, promote, or in any way imply the effectiveness of any trading system, strategy, or approach. Traders are advised to do their own research and testing to determine the validity of a trading idea. Trading and investing carry a high level of risk. Past performance does not guarantee future results.
FUTURES & OPTIONS TRADER • October 2008
Jonathan F. Maher has a Ph.D. in engineering and an MBA from the top-ranked program for technology management. He worked in the high-tech industry for more than 20 years, holding many high-level managerial positions in development and marketing. Maher first started trading options in 1984 while working on his Ph.D. In 2004, he founded DocMaher Trading LLC, an investment education company that works with traders one-on-one. He has taught hundreds of people about options strategies. Maher’s specialty is conservative income strategies that capitalize on time and volatility. These include iron condors, calendars, and hybrid strategies such as the “W” trade. Income strategies are intended to be higher probability trades that can profit over a wide range of stock movement. You can also find his writings as an “All Star Commentator” on the TradeKing’s blog. Jay Kaeppel is a trading strategist with Optionetics, Inc. and writes a weekly column, “Kaeppel’s Corner” for http://www.optionetics.com. An independent trader, Kaeppel has been active in the financial markets for more than two decades. He was the head trader at a CTA for 8 years and a trading system and trading software developer for 15 years. As an author, Kaeppel has published three books on trading, The Four Biggest Mistakes in Option Trading, The Four Biggest Mistakes in Futures Trading, and The Option Trader’s Guide to Probability, Volatility and Timing. His latest book, Seasonal Stock Market Trends: The Definitive Guide to Seasonal Stock Market Trading, will be released by Wiley in January 2009. Kaeppel has also been a noted speaker at a variety of live and online investment seminars. Jack F. Cahn, CMT has been involved in the financial markets since 1974. Over the years, he has worked as a technical market analyst for Stix & Co, Merrill Lynch, Sherson Loeb Rhodes, and R. Rowland and Co. He was director of the Markets Technicians Association from 1990 to 1995 and is a member of the Australian Technical Analysts Association and the International Federation of Technical Analysts. Cahn has developed trading systems as president of Creative Breakthrough, Inc. (http://www.traderassist.com) since 1989. Frederic Ruffy is the senior options strategist at http://whatstrading.com, a site dedicated to helping traders make sense of the complex and fragmented nature of listed options trading. In addition to writing market commentary and trading-related books and articles, Ruffy has also worked as an instructor, educating investors on advanced topics such as volatility, the benefits of sector rotation, and trading around earnings. Ruffy is an active trader with more than 15 years experience in the industry. His market observations and analysis of the options market are featured regularly in the financial press including Barron’s, Reuters, The Wall Street Journal, Bloomberg, and Futures Magazine. Steve Lentz (
[email protected]) is a well-established options educator and trader and has spoken all over the U.S., Asia, and Australia on behalf of the CBOE’s Options Institute, the Options Industry Council, and the Australian Stock Exchange. As a mentor for DsicoverOptions.com, he teaches select students how to use complex options strategies and develop a consistent trading plan. Lentz is constantly developing new strategies on the use of options as part of a comprehensive profitable trading approach. He regularly speaks at special events, trade shows, and trading group organizations. Jim Graham (
[email protected]) is the product manager for OptionVue Systems and a registered investment advisor for OptionVue Research. 5
MARKET MOVERS
Financial panic pressures already-weak commodities Late summer and early fall have been mostly red ink for commodity futures, with some food and fiber markets bearing the brunt of the most recent decline, along with some grain futures. Meats and metals were among the stronger sectors. For the most part, energy contracts were in the middle of
the pack, stabilizing a bit after their big July-September shakeout. Until Sept. 29, that is. The financial market calamity that unfolded when the U.S. congress bailed on the $700 billion bailout plan sent many commodity futures — especially crude oil — into a tailspin as money man-
agers and investors closed out positions across asset classes. For detailed performance statistics of top-volume futures contracts, see the Futures Snapshot on p. 40.
Energy Crude oil consolidated between $105 and $110 after bouncing back from its mid-September dive below the $100 mark — only to plunge more than 10 percent on Sept. 29. As of Oct. 3, November futures (CLX09) had turned down again and were trading around $94.00. Source for all: TradeStation
Metals As might be expected, gold and silver benefited from the financial market’s jitters in September. After falling below $740 on Sept. 11, December gold (GCZ08) exploded nearly $200 to $926.40 by Sept. 18. The market was trading around $842.00 on Oct. 3. Industrial metals did not enjoy the same bounce. December copper futures (HGZ08) made a new low for the year when they fell to 3.000 on Sept. 18, and have subsequently fallen as low as 2.6030.
6
Grains After a brief consolidation, grain futures renewed their sell-off in late September and early October, pushing to new lows for the year. November rough rice (RRX09) futures, however, rallied more than 20 percent from their August low to the Sept. 24 high before pulling back with the rest of the complex.
October 2008 • FUTURES & OPTIONS TRADER
Softs and fibers While coffee, cocoa, and sugar all moved sideways to moderately lower in choppy trading, cotton (CT) and orange juice (OJ) took big hits in late summer, extending their runs of new yearly lows. December cotton (CTZ08) fell some 30 percent from its spring high to lows below 60.00 in September.
Currencies Meats Livestock futures have been relatively robust, if characteristically volatile. After trading as low as 83.600 in early September, February 2009 pork belly futures (PBG09) traded above 100.000 by Sept. 26 before dropping again to below 95 as of Oct. 3.
Treasuries Treasuries were definitely not the beneficiary of the stock market’s woes — at least initially. The December 10-year T-note futures (TYZ08) fell from 11900 to around 114-00 between Sept. 17 and 25. They shot back up on Sept. 29 on a flight-to-quality move, however, climbing as high as 118-00.
Stock indices E-Mini Nasdaq 100 index futures (NQZ08) took the biggest hit on Sept. 29, plunging as much as 10 percent (to 1,494) before rallying slightly into the close. The Nasdaq 100 index (NDX) fell to its lowest level since August 2006. The market challenged this low with another sharp drop on Oct. 2.
FUTURES & OPTIONS TRADER • October 2008
7
For in-depth analysis of the FX market, go to http://www.currencytradermag.com for a free subscription to Currency Trader magazine.
MARKET MOVERS continued
Putting the Sept. 29 drop in context Any way you slice it, Sept. 29 was a pretty big day, although perhaps not quite the earth-shattering event the news media made it out to be. But we must cut the commentators some slack, as the U.S. market’s decline that day was bigger than any other in more than 20 years — since the immediate aftermath of the Oct. 19, 1987 crash, in fact. Table 1 shows the biggest one-day drops in the S&P 500 index (SPX) from September 1978 through September 2008. The first two sections of the table show the 10 largest declines measured from the previous close to the current close and the previous close to the current low, respectively. The bottom section shows the days with the biggest intraTABLE 1 — BIGGEST S&P 500 ONE-DAY DECLINES, 1978-2008 As % Close of to midpoint low
Date Close Range Close to close 10/19/1987 224.83 57.86 22.80% 10/26/1987 227.66 20.47 8.62% 9/29/2008 1117.85 96.53 8.32% 10/27/1997 876.97 64.91 7.14% 8/31/1998 957.55 76.05 7.64% 1/8/1988 243.39 18.13 7.19% 10/13/1989 333.64 22.72 6.60% 4/14/2000 1356.02 101.11 7.27% 10/16/1987 282.69 17.39 5.99% 9/17/2001 1038.77 55.08 5.17% Close to low 10/19/1987 224.83 57.86 22.80% 10/26/1987 227.66 20.47 8.62% 9/29/2008 1117.85 96.53 8.32% 4/14/2000 1356.02 101.11 7.27% 1/8/1988 243.39 18.13 7.19% 10/27/1997 876.97 64.91 7.14% 8/31/1998 957.55 76.05 7.64% 10/13/1989 333.64 22.72 6.60% 11/30/1987 230.3 14.56 6.25% 10/22/1987 248.25 15.38 6.14% Daily range as % of the day’s midpoint 10/19/1987 224.83 57.86 22.80% 10/20/1987 236.83 29.15 12.62% 10/26/1987 227.66 20.47 8.62% 7/24/2002 843.43 68.64 8.47% 9/29/2008 1117.85 96.53 8.32% 10/21/1987 258.37 20.46 8.22% 8/31/1998 957.55 76.05 7.64% 10/28/1997 921.86 67.82 7.63% 4/4/2000 1494.72 110.04 7.48% 4/14/2000 1356.02 101.11 7.27%
8
Close to close
-20.47% -8.45% -8.32% -6.87% -6.80% -6.94% -6.35% -7.02% -5.56% -5.04%
-20.47% -8.28% -7.88% -6.84% -6.79% -6.77% -6.12% -5.87% -5.16% -4.92%
-20.47% -8.45% -8.32% -7.02% -6.94% -6.87% -6.80% -6.35% -6.06% -5.95%
-20.47% -8.28% -7.88% -5.87% -6.77% -6.84% -6.79% -6.12% -4.17% -3.92%
-20.47% -3.72% -8.45% -2.76% -8.32% +0.83% -6.80% -2.47% -5.95% -7.02%
-20.47% +5.34% -8.28% +5.73% -7.88% +9.10% -6.79% +5.12% -0.75% -5.87%
day ranges, regardless if the day was up or down. (The day’s range is expressed as a percentage of the day’s midpoint, for consistency.) Sept. 29 trailed only Oct. 19 and Oct. 26, 1987 in terms of the close-to-close and close-to-low declines, but it was only the fifth largest day in terms of range. Table 2 extends the analysis by looking at the Dow Industrial Average’s (DJIA) biggest one-day declines from October 1928 through September 1978. Sept. 29, 2008 would have been the ninth-biggest close-to-close decline if it had occurred during this period, and it wouldn’t have even cracked the top-10 largest close-to-low moves or intraday ranges. TABLE 2 — BIGGEST DOW ONE-DAY DECLINES, 1928-1978 As % Close of to midpoint low
Date Close Range Close to close 10/28/1929 260.6 38.4 13.91% 10/29/1929 230.1 40.1 17.26% 10/5/1931 86.5 6.6 7.43% 11/6/1929 232.1 23.8 9.90% 12/4/1933 89.9 9.5 10.04% 8/12/1932 63.1 6.6 10.03% 1/4/1932 71.6 3.2 4.41% 7/21/1933 88.7 14.2 15.50% 9/29/2008 1117.85 96.53 8.32% 6/16/1930 230.1 13.3 5.65% Close to low 10/29/1929 230.1 40.1 17.26% 10/28/1929 260.6 38.4 13.91% 7/21/1933 88.7 14.2 15.50% 10/5/1931 86.5 6.6 7.43% 11/6/1929 232.1 23.8 9.90% 10/24/1929 299.5 40.5 13.84% 5/21/1940 114.1 9.9 8.57% 8/12/1932 63.1 6.6 10.03% 12/4/1933 89.9 9.5 10.04% 1/4/1932 71.6 3.2 4.41% Daily range as % of day’s midpoint 10/29/1929 230.1 40.1 17.26% 7/21/1933 88.7 14.2 15.50% 10/28/1929 260.6 38.4 13.91% 10/24/1929 299.5 40.5 13.84% 10/6/1931 99.3 13 13.83% 10/30/1929 258.5 30 12.20% 12/18/1931 80.7 8.5 11.06% 7/20/1933 96.3 10.9 10.87% 11/7/1929 238.2 24.3 10.57% 8/3/1932 58.2 5.8 10.39%
Close to close
-14.74% -18.53% -11.76% -11.37% -9.10% -9.29% -8.99% -12.25% -8.32% -8.33%
-13.48% -11.70% -10.73% -9.93% -9.10% -8.42% -8.09% -7.89% -7.88% -7.85%
-18.53% -14.74% -12.25% -11.76% -11.37% -10.98% -9.64% -9.29% -9.10% -8.99%
-11.70% -13.48% -7.89% -10.73% -9.93% -2.09% -6.78% -8.42% -9.10% -8.09%
-18.53% -12.25% -14.74% -10.98% +1.16% +0.35% -1.63% -8.49% -6.16% -0.56%
-11.70% -7.89% -13.48% -2.09% +14.80% +12.34% +9.35% -7.05% +2.63% +9.40%
October 2008 • FUTURES & OPTIONS TRADER
TRADING STRATEGIES
Seasonal T-bond patterns Certain months appear to be more bullish or bearish than others. BY JAY KAEPPEL FIGURE 1 — THE BEST VS. THE REST, 1977-2008
“S
easonals” are trends that tend to repeat at regular intervals or at certain times of the month or year. The following analysis looks at seasonal trends that appear to influence T-bond futures, focusing on two areas:
Being long during May, June, August, November, and December was profitable (blue line), while going long the other seven months of the year produced a net loss (red line).
1. The most bullish months of the year. 2. The most bearish months of the year. Additional research, noted at the end of this article, indicates there are also certain bullish and bearish trading days each month. The analysis suggests each of these categories holds unique opportunities for alert traders and investors.
Most bullish months of the year Research conducted on more than 30 years of Tbond prices indicates the market has a tendency to perform better during certain months of the year. At first this seems to make little intuitive sense. The idea of seasonal trends in markets such as grains (soybeans, corn, wheat) or softs (cocoa, sugar, coffee) is logical because these “hard” commodities have fixed growing and production cycles: they must be planted, grown, and harvested, and as a result they are subject to the vagaries of weather. A T-bond, by comparison, is simply a piece of paper conferring certain rights to its owner, so it would seem unlikely that T-bonds would be influenced by any seasonal factors. Nevertheless, the data strongly suggest that not all months are created equal when it comes to T-bond price trends. The most bullish months for T-bond futures are May, June, August, November, and December. First, this information does not mean T-bond prices will always rise during these favorable months or that these months will show gains during any given calendar year. The implication is simply that bonds have demonstrated a tendency to perform better during these months than during the rest of the year. Figure 1 illustrates this by showing the equity growth of being long one T-bond futures contract during May, June, August, November, and December, buying at the close of the previous month and selling at the close on the last day of the favorable month every year since November 1977 (blue line). It also displays what would have happened if you had skipped these favorable months and instead held a long T-bond futures position only during the remaining seven months of the year (red line). FUTURES & OPTIONS TRADER • October 2008
The results are compelling. Between November 1977 and July 2008, a one-contract long position held only during the five seasonally bullish months each year gained almost $112,000 (each one-point move in the T-bond futures is worth $1,000), and was profitable in 22 of the past 31 years. By contrast, a one-contract long position in T-bond futures held during the remaining seven months of the year would have registered a loss in excess of -$75,000.
Most bearish months of the year Figure 1 shows the seven months other than May, June, August, November, and December produced a net loss in Tbond prices over the past 30 years. Closer examination reveals the damage was done primarily during one segment of the calendar year — January through April. One way to take advantage of this information would be to hold a short T-bond futures position during this period. There are no guarantees a short position held during this period will generate a profit during any given year. In fact, the batting average is about 65 percent, as holding a short position in T-bonds during these unfavorable months would have resulted in an annual profit during 20 of the past 31 years. Nonetheless, the long-term trend is what we are focusing on here, and that trend clearly runs to the plus side. For more in-depth analysis of seasonal tendencies in the T-bonds, including a comprehensive seasonal trading model that combines longterm and short-term patterns, see the December issue of Active Trader magazine (http://www.activetradermag.com). For information on the author, see p. 5. 9
TRADING STRATEGIES
System filtering with %C Applying a trend-strength indicator to a volatility breakout system helps pinpoint the most promising trades. BY JACK F. CAHN, CMT
T
raders often try to forecast the market’s direction while ignoring how the market is behaving. The key question isn’t where the market is headed, but how it gets there. Anyone can make a directional forecast that becomes accurate, but that doesn’t mean they will make money. Identifying a market’s condition — flat, trending, or volatile — is what increases your trading edge. Identifying a market’s condition can tell you which trading systems will likely be the most profitable, independent of market direction. A good example of this distinction is the difference between the bear markets of 1973 and 1987. Stocks fell 20 percent in both cases, but market conditions were very different in both years. In 1973, the S&P 500 bounced around, staged several strong, fast counter rallies, and took 10 months to drop 20 percent. In 1987, the S&P fell that far on Oct. 19 alone. Traders who fail to realize why market conditions are relevant search in vain for the one robust strategy that trades well across all markets in any time frame over the past five
to eight years. They hunt for the ultimate oscillator that gives great overbought or oversold readings, but they find those signals only work in non-volatile conditions. Or they follow the trend and then suffer losses when the market returns to a trading range. Instead, you need to know how to identify the current market’s condition and anticipate when it will change. The percent contraction (%C) indicator helps determine the market’s condition and can be used to boost trading system performance.
Different market conditions The key to finding better trade opportunities is to identify a market as being in one of four main conditions:
1. A strong trend that travels in one direction, either up or down, with little or no retracement along the way. 2. A ranging trend that moves up or down over the same time period as the first condition, but with increased volatility and deep retracements. These countertrend moves take the market into overbought or FIGURE 1 — AN IDEAL TRADE oversold territory as the market remains within a On Aug. 8, the %C indicator was above its moving average and closed at 59.57, sugtrading channel. gesting the E-Mini Russell 2000 could break out of its trading range. As expected, the 3. A broad trading range that market rallied the next morning. includes the volatility and retracements of the second condition, but lacks direction or trend. 4. A dull trading range that is the opposite of a strong trend. The market lacks volatility and is also directionless.
The percent contraction indicator
Source: TradeStation
10
The %C indicator is designed to identify a market’s condition and when it might shift from one condition to another. Like the Average Directional Movement Index (ADX), the indicator measures trend strength, but it has less lag and contains more information about the market’s condition. Also, October 2008 • FUTURES & OPTIONS TRADER
FIGURE 2 — TRADING RANGE
Indicator code %C indicator:
The trade system went short on May 28 but the trade was unprofitable because the market lacked direction as %C moved higher from an extreme low.
Inputs:lng(numericsimple); Value1=TrueHigh; Value2=TrueLow; Value3=Value1-value2; Value4=Summation(value3,lng); Value5=Highest(Value1,lng); Value6=Lowest(value2,lng); If value5-value6>0 then Value7=value5-value6; Value8=(value4/value7); if Value8 0 then Value9 = Log (value8); Value10=value9/log(lng); Value11=Value10*100; @PercentC=Value11;
the %C indicator shows when the market’s condition has reached an extreme and is ready to change. The %C indicator uses true range to measure trend strength, as follows: 1. Add each bar’s true range in the 14-bar look-back period. 2. Divide this running total by the largest one-day true range value of that look-back period. 3. Calculate the logarithm of the raw value from step 2. 4. Divide the result by the logarithm of the look-back period (14, in this case). 5. Multiply by 100. The following example uses 15minute bars on the E-Mini Russell 2000 futures. On Sept. 12 at noon, the running total of the E-Mini Russell 2000 futures’ 14-bar true range was 47.3, and the largest one-bar true-range of the past 14 bars was 5. The %C reading would be: 1. 47.3/5 = 9.46. 2. log(9.46) = 0.9758. 3. log(14) = 1.1461 4. 0.9758/1.1461 = .8514 5. 0.8514*100 = 85.14
Source: TradeStation
Therefore, the %C indicator’s value is 85.14. Logarithms are used in this calculation to make sure the extreme levels range from one to 99. The indicator’s extremes can vary from market to market but normally cycle in a 40-point range — e.g., 20 to 60, 25 to 65, or 30 to 70. “Indicator code” shows the TradeStation code for the %C indicator. In general, the %C indicator measures stress levels in a market. A dull trading range develops when market tensions are high, as the lack of direction frustrates both bullish and bearish traders. In this scenario, the %C indicator trends higher from its low extreme to its high extreme. As the indicator’s value rises, the market is increasingly less likely to trend until an extreme is reached. As the indicator’s value declines, the market is less likely to be range-bound until an extreme is reached. Extreme readings represent turning points. When the indicator climbs above 55, the market will likely shift from trading sideways (conditions 3 or 4) to breaking out in one direction (condicontinued on p. 12
FUTURES & OPTIONS TRADER • October 2008
11
TRADING STRATEGIES continued
Filtered strategy #1: [LegacyColorValue = true]; Inputs: fac(.9),facs(.9); Inputs: LChopEx(65),CDLF(14); Inputs: SChopEx(65),CDSF(14); If EntriesshortToday(Date)SChopEx Then Begin Sell Short ( "DayTrader-SE" ) next bar at OpenD(0) - ((HighD(1) - LowD(1)) * fac) stop ; end; If EntriesLongToday(date)LChopEx Then Begin Buy ( "DayTrader-LE" ) next bar at OpenD(0) + ((HighD(1) - LowD(1)) * facs) stop ; End;
Filtered strategy #2: Inputs: fac(0.9),facs(.9); Inputs: TrendExup(36),LChopEx(65),CDLF(14); Inputs: TrendExdw(36),SChopEx(65),CDSF(14); If EntriesshortToday(Date)SChopEx ) Then Begin Sell Short ( "TON%CPlus-SE" ) next bar at OpenD(0) - ((HighD(1) - LowD(1)) * fac) stop ; end;
tions 1 or 2). The strongest trends follow the most extreme indicator readings. However, the longer it stays above this upper threshold, the more likely a weaker trend will develop. As the market starts to trend, the %C indicator’s value will drop as the tension between bullish and bearish traders dissipates. A trend is confirmed when the indicator falls from a high extreme (such as 55) to below its seven-bar moving average. Finally, when the %C indicator drops below 25, the trend is potentially overextended. You can use the %C indicator either as a filter in an existing trading strategy or as a portfolio management tool. As a filter, it can help identify trending markets, avoid losing trades, and boost system performance. At the portfolio level, it can tell you which trading system to favor and when to increase a trade’s size.
Trade examples Figure 1 shows a 15-minute chart of the E-Mini Russell 2000 futures (ER2) from Aug. 8 to 11. The %C indicator and its seven-bar moving average are plotted below it (red and dashed lines, respectively). Notice Aug. 8 was a dull trading-range day (condition 4). As the indicator’s value rises, 12
If EntriesLongToday(date)LChopEx ) Then Begin Buy ( "TON%CPlus-LE" ) next bar at OpenD(0) + ((HighD(1) - LowD(1)) * facs) stop ; End;
Filtered strategy #3: Inputs: fac(0.9),facs(.9); Inputs: TrendExup(36),LChopEx(65),CDLF(16); Inputs: TrendExdw(36),SChopEx(65),CDSF(14); If EntriesshortToday(Date)0930 and time 1200 and time 0930 and time 1200 and time
