<s> Stocks & Commodities V. 7:10 (372-374): Trading close-to-close patterns by Toby Crabel
Trading close-to-close patternsby Toby Crabel
D
o the relationships between day-to-day closing prices predict the next day's price moves and, if so, is
it possible to isolate these profitable chart patterns and incorporate them as entry signals in a largertrading system? In pursuit of these answers, I have tested all two- through five-day close-to-close patternsin the T-bond futures market from 1978 to 1987 (Figure 1) and discovered the beginnings of someexcellent low-risk entry techniques. My tests assumed that trades were entered on the last close of thepattern and exited on the next day's close. Stops were not used.Figure 2 is an example of the --++ pattern listed as number 24 in Figure 1. The pattern is two lowerclosings followed by two higher closings, all relative to the close immediately preceding it. Figure 1shows this pattern is most profitable as a sale. Entry is taken on the close of the last day which, in thiscase, is higher and the trade is exited on the next day's close.
...if a wide spread day occurs on the last day of the close-to-closepattern and the sell is taken on the higher open there is a dramaticimprovement ...85% profitability.The % Profit column in Figure 1 indicates a pattern's intraday "bias" or tendency to move in a particulardirection and the Gross Profit column (before slippage and commission) verifies just how effective thesetrades are. The larger these numbers, the stronger the bias. A strong bias is the signal to further pursuesystem development.The T-bond chart in Figure 3 illustrates five close-to-close patterns, of which a, c and e were profitable
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Stocks & Commodities V. 7:10 (372-374): Trading close-to-close patterns by Toby Crabel
and b and d were losers.The general results from close-to-close patterns are less impressive than that of open-to-close patterns(see "Price pattern studies," Stocks & Commodities, September 1989). Because of the marked difference,I concluded bias breaks down the longer the position is held. Risk increased dramatically as indicated bythe substantial drop in close-to-close gross profits compared to open-to-close patterns.When a high profitability close-to-close pattern precedes an open-to-close pattern, there are someinteresting results. For example, pattern 24 in Figures 1 and 2 was profitable 56% of the time whenselling, with $16,730 gross profits. That, alone, is not that impressive. But, if you wait for the next day'sopen, sell if it is higher and exit on the close, the results improve to 66% profitability and $22,244 grossprofits.Likewise, if a wide spread day occurs on the last day of the close-to-close pattern and the sell is taken onthe higher open there is a dramatic improvement—85% profitability with $ 13,837 gross profits from athird as many trades as pattern 24.An 85% winning system is quite an accomplishment. A variation of this sale places a seven-tick stopabove the open and has resulted in 52% winners with $10,500 gross profits. Most notably, on average,winning trades were four times the size of losers. Although it may be difficult to appreciate the value of asystem with only 50% winning trades, a risk as small as seven ticks makes 50% a reasonable amount.The patterns tested here can be used for indications of bias every day. Normally, it is not prudent to tradeagainst the bias unless information clearly suggests otherwise. In addition, these basic patterns provide asound base for further research.Toby Crabel is a CTA and AP with RB&H Commodities and a principal in Toby Crabel & Associates. Aformer trader at the CME and CBOT, he now edits Market Analytics, 30 S. Wacker Dr., Suite 1912,Chicago, IL 60606, (800) 621-2503, ext. 1410.
ReferencesCrabel, Toby [1988], "Opening Range Breakout, "Stocks & Commodities, Volume 6: Market Timing, pp.337,366,462.Crabel, Toby [1989], "Opening Range Breakout, " Stocks &Commodities, April-July.Crabel, Toby [1989], "Price pattern studies, " Stocks & Commodities, September.
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Stocks & Commodities V. 7:10 (372-374): Trading close-to-close patterns by Toby Crabel
FIGURE 1
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Stocks & Commodities V. 7:10 (372-374): Trading close-to-close patterns by Toby Crabel
FIGURE 2: Two lower closings on days 2 and 3, followed by two higher closes on days 4 and 5 createa --++ pattern. To the right is the same pattern as it would appear on a conventional bar chart.
FIGURE 3: Close-to-close patterns a, c and e were profitable while b and d were losers.
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