<s> Stocks & Commodities V. 8:6 (222-224): Price patterns in soybeans by Toby Crabel
Price patterns in soybeansby Toby Crabel
I
n my search to determine whether price patterns signal the next day's market direction, I have tested all
combinations of four closing prices followed by either a higher or lower open the day after the last close.I used the soybean market between 1970 and 1988 and studied 32 patterns based on open, high, low andclose. The only criterion to determine the direction of the next day's trade was gross profits.The five-day patterns in Figure 1 are symbolized by a + for an up closing relative to the previous day anda - for a down closing, with the exception of the last symbol in the pattern, which is the open and thepoint of entry for the day of the trade.For example, pattern 30 starts on day 1 with a lower close than the previous day (-). Day 2 has a lowerclose than day 1 (-). Day 3 has a lower close than day 2 (-). Day 4 has a higher close than day 3 (+). Day5's open is lower than day 4's close (-). A sale is assumed and entry is taken on day 5's open with tradeexit on day 5's close.Because a positive gross profit was the only criterion determining trade direction (buy or sell), all patternsin Figure 1 show a profit. In some cases, the percentage of profitable trades is below 50%, but the highvalue of average wins pulls gross profits into the black. In other cases, average wins are less than averagelosses, but the high percentage of winning trades produces a positive gross profit. These are borderlinepatterns that may or may not have any predictive value. A trader should consider the percentage ofprofitable trades, the average win-to-average loss ratio and gross profits when assessing the validity of apattern.A natural limitation exists in soybeans that does not exist in Treasury bonds; the potential intraday pricemove is larger in T-bonds than soybeans. All things considered, soybeans perform as well, if not better,than T-bonds in this type of basic test (Figure 2).If the five-day patterns had similar biases in each market, that would suggest some consistency in price
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Stocks & Commodities V. 8:6 (222-224): Price patterns in soybeans by Toby Crabel
behavior from commodity to commodity. As it turned out, eight of the 32 patterns had significantlydifferent biases, which suggests some difference in behavior exists between the two markets. Markeddifferences showed up in patterns 3,4, 15 and 17, which gave opposing buy/sell signals in the soybeanand bond markets yet maintained reasonably high percentages of profitable transactions in both markets.The most profitable soybean winners in Figure 1 were sales (patterns 1,10,25 and 30). There were nobuys over $10,000 gross profit. Percentage of winning trades seemed to favor the upside, but gross profitsdefinitely favored short sales. T-bonds displayed a better balance in the category of gross profits.
A trader should consider the percentage of profitable trades, theaverage win-to-average loss ratio and gross profits whenassessing the validity of a pattern.Soybean pattern 30, shown in detail in Figure 3, is a sale on day 5's open and tested better than most,especially in the average win/loss category — 59% of its 94 trades were profitable, with winnersaveraging $403 and losers averaging $210. Gross profits were $13,987.An attempt to improve on this pattern produced some interesting results. If you find an expanding dailyrange on day 4 relative to day 3 (Figure 4), it accounts for 63 of the 94 trades in pattern 30. The numberof profitable trades dropped to 51%, but gross profit was relatively stable at $8,206, since the average winwas $421 vs. the average loss of $170.Percentage profitability increases dramatically when day 4 is a narrowing range rather than an expandingrange (Figure 5). This accounts for 30 trades with 67% profitability. Gross profits were $5,581, with a$445-to-$332 win/loss ratio. This is adequate but not nearly as rewarding as T-bonds. Figures 1 and 2 canserve as useful references. The best results come from small changes of the basic patterns. Rangedifferences defining momentum and one-day patterns are very useful.In summary, a trader can assume some patterns indicate a decisive bias from open to close in the soybeanmarket. These biases were as distinct as in the bond market and showed that five-day patterns are moreprofitable on the downside. Generally, five-day patterns do not produce high profits but can still be usedas a basis for system development. Keep in mind, however, that this type of system development has notproved to be as promising in soybeans as in other markets.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 [1989]. "Opening range breakout," Technical Analysis of Stocks & Commodities: Volumes6 and 7.___ [1989] . "Price pattern studies ," Technical Analysis of Stocks & Commodities: Volume 7 .___ [1989]. "Trading close-to-close patterns," Technical Analysis of Stocks & Commodities: Volume 7 .___ [1989]. "Inside day patterns in the S&P," Technical Analysis of Stocks & Commodities: Volume 7 .
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Stocks & Commodities V. 8:6 (222-224): Price patterns in soybeans by Toby Crabel
FIGURE 1: A trader should consider the percentage of profitable trades, the average win-to-averageloss ratio and gross profits when assessing the validity of a pattern. Because a positive gross profit wasthe only criterion determining trade direction (buy or sell) all patterns here show a profit.
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Stocks & Commodities V. 8:6 (222-224): Price patterns in soybeans by Toby Crabel
FIGURE 2: Significantly different biases between two commodities suggest different behavior in the twomarkets.
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Stocks & Commodities V. 8:6 (222-224): Price patterns in soybeans by Toby Crabel
FIGURE 3: Soybean pattern 30 is a sale on day 5's open. In the average win/loss category 59% of its94 trades were profitable with winners averaging $403 and losers averaging $210. Gross profits were$13,987.
FIGURE 4: If you find an expanding daily range on day 4 relative to day 3, it accounts for 63 of the 94trades in pattern 30.
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Stocks & Commodities V. 8:6 (222-224): Price patterns in soybeans by Toby Crabel
FIGURE 5: Percentage profitability increases dramatically when day 4 is a narrowing range rather thanan expanding range.
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