2 ° 3+ NOV 16 62 37 17 ~.10 5 3 ° 8++ NOV 17 7 28 et -.03 5 2 ° 7+++ NOV 18 100 Oo 219 00 8 ° ° 3+ NOV 19 62 37 23 244 5 3 9 38+ NOV 20 62 37 27 -.44 s 3 9 8++ NOV 21 75 25 .28 -.415 6 2 Qo eStt+ NOV 22 100 0 26 00 6 ° ° 6NOV 23 s7 42 12 =. 10 4 3 QO ?+++ NOW 24 100 ° 18 00 5 ° ° 5+44 NOV 25 83 16 23 00 5 4 ° 6+ NOV 26 66 33 34 7.44 4 2 ° éNOV 27 s7 42 31 n.d 4 3 ° ?+ NOV 28 6s 33 25 7.44 4 2 °o 6++ NOV 29° #75 25 27 -.16 6 2 ° 3+ NOW 30 62 37 21 - 113 Ss 3 oO 8
Figure 16-8. Daily seasonals, S&P futures. (Continued)Montn
Day
AUG-- AUG- AUGAUGAUGAUGAUGAUS
- AUG- AUGAUGAUGAUG
- AUG- AUG-- AUG- AUGAUGAUGAUG
~ AUG~ AUG- AUGSEPSEP
+ sep7 SEPSEPSEP
- sEPser
+ SEPSEPSEPsepSEP
- SEPsep
910Wd12131445
 
% Of TimeUp Down50 50e7 7240 6030 so4S s4a4 5036 s440 50e7 6340 604a 55as s4a4 5836 6340 5027 7240 6030 5064s s444 se36 6340 6036 Os50 50so 3062 3740 604a 55aa 5537 62so so60 404s S4Ad 5845 54so so36 63SO 50
--- Average % ---up Downeeeaee2= sosscczeor -.0405 -.05os -.0606 -.0606 -.0607 -.07038 -.05o5 -.0406 -.0809 -.0608 ~.07.08 -.06oe -.0609 -.0406 -.0406 ~.0509 ~.06O7 -.07.07 -.0808 -.0710 -.0506 -.04204 -.06o4 -.08o7 -.1007 -.412o7 -.0808 -.05.0S ~.0406 -.04.O7 -.0906 -.1006 -.08.O7 ~.0707 -.0805 -. 0406 -.0607 -.09
Figure 16-9. Daily seasonals, T-bond futures.
How Seasonality Influences Markets
 
Up
534s5544344s5443453544444s444356555s45
YearsDown
in Sample -
uncon
 
Total
EuEass Raese=s sses55
ANAAANKREHAAUMOOWEENIDYIGUADOINIOUANED HE OUSON
OoAMNTOVDODTDVODATVOONAO OOOO OOD OOO Ons eA OD000
1044104044241410a410
91412
157158
Chapter Sixteen
Month
ODay
sececex
+ SEPSEPSEPSEP
+ sEP
~ SEPSEPSEPSEPsepSEPSEP
OCTOCTOCT
16
Up Downeure ceee60 404s 5441 ses4 4s60 4036 «6345 5454° 45450 54at ss41 s654 4533 66a8 54540 4545 5441 5Bay sa45 5433 664s 84s4 aS45 5441 58a1 se45 54330 (6645 54$4 4s45 5441 sa50 sOS44541 58450 SaS4 as54 4550) SO
% Of Time
--- Average % --~
up
Down
eewerecs semceeee10
-08.07
06-06O705-9506
 
up
Seaman ecesee eesses
AOHRUVUAARYDUFUUAUAUEAUUGADEDUARFAUNEDAUUD
Years in Sample -----
Down
AUBANVGANVAUADDAVIVAUBHAINGAUADUINIOUGIEUIOE
Figure 16-9. Daily seasonals, T-bond futures. (Continued)
Uncen
SOCODSDFOGOSDIDGIDOODOCOONG OOO D OOOO ODOODOD00
Total
10Month
Day
ocTOCToct
NOVNOVNOVNOVNOV+ NOV- NOVNOVNOV+ NOVNOV- NOVNOVNOV
au
% Of TimeUp Down
50
so
--- Average % ---up Down07 -.0707 ~.06.06 7.0809 -.09.07 -.09o7 -.t408 -.40.08 -.0808 -.06os -.0810 -.9809 ~.0608 -.1009 -.0808 -.0808 -.06.08 -.0609 -.08.08 -.0708 -.0908 -.0808 ~.0708 -.0507 -.0609 -.07O° -.0709 -.0909 -.0809 -.0709 -.0406 -. 0612 -.0907 -.0710 ~.09.O7 -.06.09 -.07os -.05O7 -.05
How Seasonality Influences Markets
wc-7- Years in Sample -~----
Up
Smanes eesees esses
UAEWUELEDAHAGAAHADHAAUFEARUAOUEDAATDAAUAD
Down
6
ATHOUWNUEDHOHUBDAIYOOUGOOUHIMESYUAoHUa NY
Figure 16-9. Daily seasonals, T-bond futures. (Continued)
unch
eSKCOGCDDDOGGCADOBGOSCODVOGFOOGOOOO OCOD OD OOOO
Total
sesees1244124441141212414441044
159160 = Chapter Sixteen
 
 
 
   
 
 
 
 
 
 
Month % Of Time --~- Average % --- ----- Years in Sample ---~-Day Up Down up Down up Down Unch Totalsees sees ceeeeess seeeeees oseeeee seeces ceerae aeecse- 330 «66 06 4 8 ° 12- 3e 64 06 3s 8 ° 13- 3B O64 06 5 8 ° 13- 3a 61 05; 5 8 ° 1346 53 07 6 7 ° 134600 53 08 6 7 ° 43- 30 69 240 4 9 ° 13- 33 66 08 4 8 ° 12-~ 38 61 08 5 8 ° 13- se 61 o7 5 8 ° 13- 33 «66 5 4 8 ° 1246 53 08 6 7 ° 1346 53 09 6 7 ° 13- 30 «69 10 4 9 ° 1541 $8 06 5 7 ° 1246 53 .07 6 7 ° 13AUG 25 46 53 06 6 7 ° 13AUG 26 46 53 06 6 7 o 13AUG 27 46 53 oa 6 7 ° 13AUG 28 46 53 09 6 7 ° 13~ AUG 29 38 41 08 5 8 ° 13AUG 30 44° 58 06 5 7 ° 12AUG 31 46 «53 o7 6 7 ° 13SEP 1 50 50 06 5 s ° 10sep 2 45 SH 06 5 6 ° 1SEP 3 50 SO 07 s s ° 10SEP 4 45 54H 09 5 6 ° 14- SEF 5 40 €0 09 4 6 ° 10- SEP 6 40° 60 07 4 6 ° 10- sep 7 40 66 08 4 6 ° 10SEP 8 46 53 o7 6 7 ° 13SEP 9 46 53 05 6 7 ° 13SEP 10 46 53 07 6 7 ° 13SEP 11 46 53 08 6 7 ° 13- SEP 12 38 61 07 5 8 ° 13SEP 130 41 58 06 s 7 ° 12SEP 14 46 $3 07 6 7 ° 13SEP 15 460 53 06 6 7 9 13
 
Figure 16-10. Daily seasonals, Swiss franc futures.How Seasonality Influences Markets 161
Month % Of Time --- Average % --~ ~---- Years in Sample ----Day up Down up Down Up Down unch = Totaseesee osae= se25 seeneses eaeesces osaage5 ceases coceee execsSEP 16 46 53 05 6 7 ° 13SEP 17 46 53 08 6 7 ° 13sep 18 46 53 09 6 7 9 13- SEP 19 38 61 .08 5 8 o 13SEP 20 41 58 06 5 7 ° 12SEP 21 46 53 07 6 7 ° 13SEP 22 46 53 07 6 7 ° 13SEP 23 46 53 08 6 7 ° 13SEP 24 46 53 os 6 7 ° 13SEP 25 46 53 210 6 7 ° 13- sep 26 38 61 09 s 8 ° 13SEP 27 44 58 08 5 7 0 12SEP 28 46 53 08 6 7 ° 13SEP 20 46 53 08 6 7 ° 15SEP 30 46 53 06 6 7 ° 13ocT 1 46 53 09 6 7 ° 13ocT 2 46 583 10 6 7 ° 13- oct 3 38 61 0° s 8 ° 13OCT 4 41 58 07 5 7 ° 12oct 5 46 55 08 6 7 ° 13oct 6 46 53 o7 6 7 ° 13oct 7 46 53 06 6 7 ° 13oct 8 46 53 08 6 7 ° 13oct © 46 53 10 6 7 ° 13- OCT 10 38 61 09 5 6 ° 13oct 11 41 58 og 5 7 ° 12oct 12 46 83 os 6 7 ° 13ocT 135 46 53 o7 6 7 ° 13OCT 14 46 53 06 6 7 ° 13oct 15° 46 53 oa 6 7 ° 43ocT 16 46 53 40 é 7 ° 13- OCT 17 38 61 10 5 8 ° 13ocT 18 41 58 os 5 7 ° 12OCT 19 46 53 oe 6 7 ° 13OCT 20 46 53 07 6 7 ° 13ocT @t 46 53 06 6 7 ° 13OCT 22 46 53 08 6 7 ° 13oct 23 46 583 10 6 7 ° 13
 
Figure 16-10. Daily seasonals, Swiss franc futures. (Continued)162
Chapter Sixteen
Month
Day
eeesee
- OCTOCTOCTOCTocTOCTocT
- oTNOVNOVNOVNOVNOVNov
~ NOVNOVNovNOVNOVNOVNOV
- NovNOVNovNOVNOVNOVNov
- NovNovNovNOVNOV
- NOVNOV
- NOVNOVNOW
242s26e7ee2903031
 
 
% Of TiUp Downseas wereze 6141 $846 5346 5346 0 5346 5346 5338 6141 8841 5846 83so 5G460 5346 8333 (6644 58460 5346 5346 5346 5346 8338 6141. $846 5346 S346 8346 5346 5338 6444 $5450 5444 55505040 «6050 5036 6341 5846 53
--- Average % ---up Downgacscras ssseress109 -.08.08 -.09.08 -.0907 -.0806 -.09-08 -.08210 -.07210 -.08.08 -.09-09 -.0806 -.08.06 -.0908 -.0709 -.06.09 -.07.08 ~.09.o8 -.0806 -.0806 -.08oa -.0709 - 0609 -.0707 -.0907 -.0805 -.0806 -.08.08 -.0709 -.06os ~.0705 -.0607 - 0906 -.0707 -.0709 -.081.09 -.0609 -.07.O7 -.08o7 ~.07
Up
YearsDown
in Sampleunch
Total
DAEUEHDEUEVHDAMEHMUDABRHOBUEDAAHUUUAHOOAUY
VAN GOUUHAHHAVANVAIVOVIANV YVONNE N ONAN
OODGHOOKCAOCODDDOCOOSOGODOCADBO ODDO OOOO ON
Figure 16-10. Daily seasonals, Swiss franc futures. (Continued)
1312431313134134312121312131317
IntradaySpread Trading
The futures spread is perhaps the least used and least understood vehi-cle in the world of futures trading. To most traders the idea of spreadinga market is totally foreign. Can you imagine their surprise when I sug-gest trading spreads in the day time frame? Whereas many traders con-sider spreads to be an intermediate- to longer-term vehicle, J feel thatsome spreads can also provide day-trading opportunities. Provided youselect the right spreads, you can use many of the technical tools I’vedescribed in this book as entry and exit methods.
As you know, a futures spread involves buying one contract and sellinganother. You are long and short at the same time. The contracts may be inthe same markets or in different markets. In other words, you can be longJune cattle and short October cattle which would constitute an intracom-modity spread. You can buy July wheat and sell July corn. This is anintercommodity spread. Typically intercommodity spreads are bettervehicles for day traders, since these spreads tend to exhibit more of thecharacteristics which are prerequisites to successful spread day trading.
Preselection: The Key to ProfitableSpread Day TradingThe key to profitable trading spread i is the preselection process. In otherwords, you need to select spreads for day trading which meet the fol-lowing criteria:1. They must be volatile. In other words, they must be spreads which tendto show sufficient price movement during the day to make themviable trading vehicles.
2. They must have a sufficiently high tick value. High tick value makesspreads worthwhile from the day-trading perspective.
163164 = Chapter Seventeen
3. They must be sufficiently liquid. Liquidity permits entry and exit with-out difficulty.
With these factors in mind I will now outline the processes and meth-ods for day-trading spreads.
Methods of Spread Day Trading
Support and Resistance Levels. The most specific and basicmethod of day-trading spreads is to determine support and resistancelevels at the end of the trading day and to use these levels as entry andexit points the next day. The chart shown in Figure 17-1 illustrates somesimple support and resistance buy-and-sell points (i.e., by buy and sell Imean entry and exit points for the spread) using traditional support andresistance lines. This is, as you can easily see, a very simple and effectivemethod for day-trading spreads.
Just remember that if you are day trading a spread then you must bein and out of the spread the same day. Do not carry the spreadovernight, since this would, as you know, negate the entire purpose ofday trading. Since the spreads you will be day trading are selected fortheir volatility, I urge you to avoid carrying them overnight in order tocircumvent any nasty surprises the next day.
Thirty-Minute Timing with Stochastics. Now consider the samechart as shown in Figure 17-1 but with the addition of a 9-period slowstochastic indicator using SP and traditional stochastic timing signals asdescribed in Chapter 5. Examine Figures 17-2 and 17-3. Please carefullystudy my notations. As you can see, stochastic timing methods forspread entry and exit have considerable potential provided there is suf-ficient movement in the spread to allow for intraday trading.
Spread Timing with RSI. Yet another method of timing intradayspread entry and exit is by using either a 14- or a 9-period RSI. Severalmethods of application are illustrated in Figures 17-4 through 17-7. Hereis a synopsis of the methods:
= RSI crossovers from below 50 and above 50. This is a simple method.When RSI is 50 or over you will want to be bull spread (i.e., long frontmonth and short back month). When RSI crosses from above 50 tobelow 50, you will want to be bear spread. If the crossover occurs dur-ing the day with sufficient time left for a trade, then you can initiate aposition and/or reverse a previous position. Be out by the end of theIntraday Spread Trading 165
: SuPPORT
| proken
 
Figure 17-1. Support and resistance points: Intraday spread chart.
 
Figure 17-2. Intraday spread chart with stochastics and stochastic pop tech-nique—entry and exit signals.166 Chapter Seventeen
 
Figure 17-3. Intraday spread chart with stochastics and stochastic pop tech-nique—entry and exit signals.
 
Figure 17-4. Intraday spread chart: RSI entry and exit signals.Intraday Spread Trading 167
[aris ari ais avg 47
 
Figure 17-5. Intraday spread chart: RSI entry and exit signals.
    
Figure 17-6. Intraday spread chart: RSI entry and exit signals.168 = Chapter Seventeen
 
Figure 17-7. Intraday spread chart: RSI entry and exit signals.
day. The next day you can establish a new position in the spread con-sistent with the RSI reading and be out by the end of the day orreverse on a reversing signal. At times there will be several oscillationsabove and below the 50 percent RSI line. If this occurs too frequently,then use a longer RSI period (i.e., 18 or 24 as opposed to 9 or 14).
RSI crossovers from below 25 and above 75. This is also a very simplemethod. When RSI is 75 or over you will be bull spread (i.e., longfront month and short back month) from a previous buy entry. WhenRSI crosses from above 75 to below 75, you will want to be bearspread. If the crossover occurs during the day with sufficient time leftfor a trade, then you can initiate a position and/or reverse a previousposition. Be out by the end of the day. The next day you can establisha new position in the spread consistent with the RSI reading and beout by the end of the day or reverse on a reversing signal. At timesthere will be several oscillations above and below the 50 percent RSIline. If this occurs too frequently, then use a longer RSI period (ie., 18or 24 as opposed to 9 or 14). If RSI is 25 or lower you will already bebear spread from a previous sell signal. If RSI then goes above 25, youwill reverse positions and exit at the end of the day or on a reversingsignal. At the beginning of the next day enter the spread again consis-tent with the RSI reading.Intraday Spread Trading 169
® RSI first derivative crossovers. This method is very specific and does notdiffer from the previously discussed RSI first moving average (MA)derivative method already discussed. The rules of application aresimple. If RSI is below its MA derivative, then you will be bearspread. If RSI is above its first MA derivative, you will be bull spread.Exit at the end of the day or reverse during the day if there is acrossover signal. You can reinstate position the next day on or nearthe open consistent with the last signal.
What You Can Realistically Expect
Over the years I have developed both a strong liking as well as a strongrespect for spreads and those who trade them well. Spreads can offermore conservative opportunities and higher probability of success. Butto benefit from intraday spread trading, you will need to choose volatilespreads. Many of these are cross currency spreads, but there are timesduring which grain and livestock markets, cotton, interest rate, andinter-precious-metals spreads can be traded very effectively. You willneed to remain aware of which spreads are sufficiently volatile and liq-uid for day trading. Finally, it is always best to use price orders forspreads, since market orders can prove very costly both on entry as wellas on exit. As long as you remain aware of the risks, volatility, and liq-uidity of the spreads you are trading, then you can do very well tradingspreads on an intraday basis.The Consecutive ClosesSystem
Yet another method of finding profitable day trades is what I call theconsecutive closes system. The approach is simple. As the name indicates,this method generates buy and sell signals based on the number of con-secutive higher or lower closes. Although markets post true closingprices at the end of each trading session, this does not, in fact, occur onan intraday basis. We simply refer to the last price of each 5-minute timesegment as the 5-minute closing price. In actuality, it is not a closing pricebut merely the price at the end of each 5 minutes. A 30-minute closingprice would be the closing price at the end of each 30-minute time seg-ment. While this is truly a simple concept, it never ceases to amaze mehow many traders who are otherwise knowledgeable and intelligent failto grasp the idea. Please make sure that you do before reading on.
Definitions and Signals
170
The consecutive closes system (CC) is based on a simple but profitableand sensible concept: Once a trend has established itself, it is best to gowith that trend until and unless it changes. The problem is, as always,twofold. First, you need to identify the trend, and, second, you need toknow when to get aboard the trend. The CC system achieves these goalsas follows:
1. A buy signal and an up trend are defined when the market has madea given number of up closes in a row. Therefore, if we are using a sig-nal which consists of five consecutive up closes in a row, we areusing a 5CCU buy signal (5 consecutive closes up).
2. A sell signal and a down trend are defined when the market hasmade given number of down closes in a row. Therefore, if we areHow the
The Consecutive Closes System 171
using a signal which consists of five consecutive down closes in arow, we are using a 5CCD signal (5 consecutive closes down).
That’s all there is to the basic signal and trend identification. Figures18-1 and 18-2 show each of the signals in ideal form, and Figures 18-3and 18-4 show them in real time on a 5-minute bar chart. As you cansee, a CCU signal triggers a buy, and a CCD signal triggers a sell.Figures 18-5 and 18-6 illustrate the CCU and CCD signals on a 10-minute chart.
CC System Operates
The implementation of CCU and CCD signals is also a simple matter. Ifa5 CCU buy signal is being used, then you buy the fifth higher consecu-tive close (see figures). You hold the position with a predetermined stoploss or you exit the long and reverse to short when you get a CCD sellsignal. In practice, the number of consecutive closes which generates abuy signal will not necessarily be the same as the number of CCs whichgenerate a sell signal.You may use three approaches in implementing the CC system.
= Close out positions at a specific target. The problem with this approachis that you will limit your profits. When a runaway move occurs, you
 
Figure 18-1. Basic CC buy signal.172 ~~ Chapter Eighteen
 
Figure 18-2. Basic CC sell signal.
a“ae us
'! :
saa tnd " —
 
Figure 18-3. Actual 5-minute CC buy signal.The Consecutive Closes System 173
| h
: einny 3 ov. rr.
cna penguest “TP :. ith
 
Figure 18-5. Actual 10-minute CC buy signal.174 ~~ Chapter Eighteen
 
Figure 18-6. Actual 10-minute CC sell signal.
won't be on board. The successful trader must ride profits as long aspossible.
= Close out and reverse positions when a reversing signal has occurredor at the end of the day.
= Use a trailing stop loss. You will find that using a trailing stop loss toexit positions and go flat may serve you better than using a strictlyreversing system.
Summary and Conclusions
The CC method is a viable and effective technique for short-term andday trading. This technique appears to perform better on a short-termbasis, carrying positions for several days, than it does strictly on a day-trade basis. Remember, however, that this system will work better atsome times than others, that it will work better in more volatile markets,and that you are better off using a trailing stop loss as opposed to wait-ing for a reversal signal.SentimentReigns Supreme
Perhaps the single most overlooked indicator in short-term futures trad-ing is that of market sentiment. I have written and researched extensive-ly on this topic. Since I first began trading in 1968 I have been fascinatedwith mass psychology in the stock and futures markets and with theapplication of market sentiment measures as objective methods inassessing trader psychology. Possibly it may have been my originaloccupation of clinical psychologist which attracted me so strongly to theconcept of contrary opinion and market sentiment. In any case, it is aninterest that has persisted through the years. Indeed, market sentimentand trader psychology have been more than mere passing interests—their application to short-term trading has served me well.
In studying market sentiment we find with few exceptions that whenthe vast majority of traders expect a market to move in a given direction, it ismost often true that the majority is wrong. | won't go so far as to say thatthe majority is always wrong. This is not the case. In fact, the majoritycan be right very frequently for brief periods. However, my studies showedthat the more strongly the majority maintains a given opinion, whether bearishor bullish, the more likely the majority is to be wrong.
My desire to quantify market sentiment as a measure of trader psy-chology led me to search far and wide for concise market sentiment datawhich would assist me in my short-term trading. For years, however, Iwas unable to find such information due to the fashion in which marketsentiment data were collected and disseminated. R. Ear