10 ____________________________________________________OXOX__________________OXO___________________________O_O_________OX_____ 11101100 ....................................................OXOX..................O..................................|......OX..... 11001090 ....................................................OXOX.....................................................|......OX..... 10901080 ....................................................OXOX.....................................................|......OX..... 10801070 ....................................................OXOX.....................................................|......OX..... 10701060 ____________________________________________________OXOX____________________________________________________________OX_____ 10601050 ....................................................O.OX.....................................................|......OX..... 10501040 ......................................................OX.....................................................|......OX..... 10401030 ......................................................OX.....................................................|......OX..... 10301020 ......................................................OX.....................................................|......O...... 10201010 ______________________________________________________OX___________________________________________________________________ 10101000 ......................................................O......................................................?............. 1000990 -------------------------------------------------------------------------------------------------------------0------------- 990980 -------------------------------------------------------------------------------------------------------------3------------- 980
Analysis of trading GSK.LMinimum Reversal
2
Scale Type
Standard
Start Date
2002-01-01
End Date
2003-02-01
Strategy
S2iSSoSST12
Gross P&L
311
Trades
30
Stops hit
9
148
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The tests or simulations described on the preceding pages were carried out on our proprietarysoftware. As input, we used the time series made out of records date, open, high, low, close andvolume. We tell the computer which strategy to use and then the computer starts charting and assoon as it finds a signal a position is taken – considering the ex-post paradigm, meaning that atrade can only be done on the level that follows – in occurrence – the signal. This sort of testingcomes as close as possible to the actual trading based on p&f charting.If you don’t have such software, we explain in the later chapter how to go about testing. Butbasically you use your standard software to produce the chart and then you run the “papertrading” yourself. Obviously, as it is dangerous to cheat oneself, it is imperative to use the realcommissions and real estimates of the trading prices in order to calculate one’s hypotheticalreturns.
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Day-trading, speed trading, scalping & market making
IntroductionThis chapter is about trading styles which generate a lot of transactions. The same principlesapply to scalping, high-speed day-trading, and making markets. Market-making certainly raisesadditional considerations, like trading against one’s inventory, but essentially it is trading,whereby every change in the market price matters. What we especially cover in this section isthe application of point-and-figure to a trading style where the smallest oscillations of marketprice are considered.This chapter is for the professional trader. We all know about the benefits of trading duringthe day, such as avoiding uncontrollable overnight risks. Or we know from many studies (seeOlsen’s website3) that intraday data is less chaotic or trends better than end-of-day data.In this chapter we confine ourselves to technical aspects, because we assume that the readerinterested in this section knows about trading and has a professional set-up to conduct histrading business.The most important thing to keep in mind is that we have price data which we display on avariable time-axis, exactly like in end-of-day trading. Therefore, all that is said about signals andtrend lines is as valid for intraday as for end-of-day. Probably the only difference is in the wayone can pyramid, because, as mentioned above, intraday trends better, and therefore a moreaggressive approach can be taken.An interesting observationThe only p&f chart format that is 100% complete is the one based on tick data (or time&sales).The reason is that all other formats actually condense information and occasionally omitintraday reversals. The typical open-high-low-close data ignores a great deal of price-actioninformation; you get to know these for points, open-high-low-close, but not the way they werereached. Have there been many ups and downs during the day or was it a regular move? For thisreason we would like to encourage everyone to experiment with intraday data. In most cases,however, the handling of the sheer amount of information is the primary obstacle and if you donot day trade actively, you will probably not gain much, except for the insights and experiencesof having worked for a while with the purest form of a chart.P&F and high-frequency dataIn general, charting is said to be done either end-of-day or intraday. End-of-day chartinginvolves one price set per asset each day. Intraday charting requires market data during thetrading session. If we talk about high-frequency data, we refer to transaction per transaction data150
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– time&sales or such time&sales data arranged in time-high-low-close records (or data sets)covering very small time intervals, like 1 to 5 minutes.We recommend that you start each day-trading session with a thorough study of the traditionalend-of-day p&f charts in order to assess the stocks you want to trade before the opening.Resistance and support levels should be carefully studied and a strategy devised for the tradingday to come.Normally traders who use high-frequency data are professional traders. They have a real-timedata feed from the exchanges or use a data provider like e-Signal that offers real-time feeds. Insuch a professional trading operation, which involves high speed trading based on real-timedata, there are three challenges to point-and-figure charting:1.2.3.
Integration of the data feed with your charting softwareStorage of the real-time dataAccess to historical high-frequency data
We will examine each of these points later.Does P&F combined with high-frequency data makes sense?
The answer is a strong Yes. We know from many theoretical studies that intraday data is the leastrandom, therefore the best suited to technical analysis.As with all financial tools, one has to get used to them. That is the reason we include some chartsregarding intraday point-and-figure in this chapter. We have used point-and-figure over varioustime spans for activities like futures-scalping, stock dealing and options market-making. And theresults and experiences have always been positive.Again p&f tells you the story of the price moves and the crossings of support levels andresistance levels with a clarity that is far superior to any other system known to us. What youwant to do with the story told by p&f chart depends on your trading style, which is defined byyour risk tolerance, financial strength and overall strategy, like scalping, risk arbitrage,momentum trading, and so forth. But what is certain is that the p&f chart, with its lowdimensionality (in other words, just a price, not a time, dimension), does give the clearest of allsignals – which is crucial for an activity as fast as day-trading. You just do not have time to dointerpretations. Clarity is the major advantage of point-and-figure when applied to fast tradingstyles.
Scaling of the intraday chartScaling of the intraday chart should be done with multiples of tick-sizes. The chart should bescaled so that it does not get affected by the minimum bid-ask oscillations. Therefore, westrongly suggest never to use a box size smaller than 2 ticks.151
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Examples of intraday charts
In the following charts, a new day is indicated with a number on a yellow background.Otherwise, they are exactly the same as the end-of-day charts shown up to this point: 3-boxreversal, using the same signals. Newcomers to intraday p&f charts should note that they maysuggest continuity where there is none, and that they don’t give information regarding theopening or close. Looking at the Barclays chart below, it is impossible to say where it closed onDay 1 (anywhere between 347 and 360, which are the highs and lows of the column before thecolumn which is marked with the yellow two) or where it opened on Day 2 (it could beanywhere between 348 and 355.)Chart 3.23 – Intraday 24.01.03 - 30.01.03, Barclays [BARC.L]363362361360359358357356355354353352351350349348347346345344343342341340339338337336335334333332331330329328327326325324323322321320319
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........................................................_X_X________________________.XOXO........................XOXO........................XOXO........................XOXO......................._XOXO_______________________.1O.OX..........................OXO.........................OXO.........................OXO.....................____OXO_____________________....OXO..............X..........OXO....X.........XO.........O2O..X.XO........XO.........O.O..X3XO........XO.....______O__XOXO________XO_____......O..XOXO......X.XO...........O..XOXOX.....XOX............O..XOXOXO....XOX............O..XOXOXO....XO.......______OX_XO_OXO____X________......OXOX..OXO....X..............OXOX..O.O....X..............OXOX....O....X..............OXOX....O..X.X........______OXOX____O__XOX________......OXO.....O..XOX..............OX......O..XOX..............OX......O..XOX..............OX......O..XOX........______O_______O__XOX________..............O..XOX......................4..XOX......................O..XO5......................O..XO.........______________OX_X__________..............OXOX........................OXOX........................OXOX........................OXO...........______________O_____________........................................................
363362361360359358357356355354353352351350349348347346345344343342341340339338337336335334333332331330329328327326325324323322321320319
Trading Applications
Chart 3.24 – Intraday, 06.01.03-10.01.03, Vodafone [VOD.L]124.25124.00123.75123.50123.25123.00122.75122.50122.25122.00121.75121.50121.25121.00120.75120.50120.25120.00119.75119.50119.25119.00118.75118.50118.25118.00117.75117.50117.25117.00116.75116.50116.25116.00115.75115.50115.25
...........................124.25___X_______________________124.00...XO......................123.75...XOX.....................123.50...XOXO....................123.25...XOXOX.X.........X.......123.00___XOXOXOXO________XO______122.75...XO.O.OXO........XO......122.50...2....OXO........XO......122.25...X....OXO........XOX.....122.00...X....OXO........XOX.....121.75___X____O_O________XOX_____121.50...X......O........XOX.....121.25...X......O........XOX.....121.00...X......O........XOX.....120.75...X......O........XOX.....120.50___X______O________XOX_____120.25...X......O....X...XOX.....120.00...X......3....X4..XOX.....119.75.X.X......OX...XO..XOX.....119.50.XOX......OXO..XO..XOX.....119.25_XOX______OXO__XO__XOX_____119.00.XOX......OXO..XO..XOX.....118.75.XOX......O.OX.XO..XOX.....118.50.XOX........OXOXO..XOX.....118.25.XO.........O.OXO..XO......118.00_X____________OXO__5_______117.75.1............O.O..X.......117.50................O..X.......117.25................O..X.......117.00................O..X.......116.75________________OX_X_______116.50................OXOX.......116.25................OXOX.......116.00................OXOX.......115.75----------------O-O--------115.50---------------------------115.25
In the Vodafone chart above, you can see how good the simple signals are at capturing theaccelerated moves, like the up move during Day 1 and the down move during Day 2. On Day3, where the stock showed very little intraday volatility, you can see that the signals become lessuseful.
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Strategies for day-tradingIn intraday charts you often see long columns of Xs or Os. Your trading strategy should bedesigned to get you into the position on a simple buy or sell, and then get you out either after acertain number of boxes have been filled or on the first reversal.The Vodafone intraday chart below illustrates how crucial it is to protect profits by usingstrategies such as taking profits on the reversal, “10 up 3 down and out” or setting profit targets.On the last day, the open (at 120) and the close of the day (at 122) are highlighted. What youcan see from the chart is that trading the intraday swings, in our case 120 to 123 to 118 and backto 122, would have been highly profitable for a day-trader only if strategies were used to takeprofits early. These strategies were covered earlier in this chapter but opposite is a briefreminder.Chart 3.25 – Intraday, 06.01.03-10.01.03, Vodafone [VOD.L]124.25124.00123.75123.50123.25123.00122.75122.50122.25122.00121.75121.50121.25121.00120.75120.50120.25120.00119.75119.50119.25119.00118.75118.50118.25118.00117.75117.50117.25117.00116.75116.50116.25116.00115.75115.50115.25
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...........................124.25___X_______________________124.00...XO......................123.75...XOX.....................123.50...XOXO....................123.25...XOXOX.X.........X.......123.00___XOXOXOXO________XO______122.75...XO.O.OXO........XO......122.50...2....OXO........XO......122.25...X....OXO........XOX.....122.00...X....OXO........XOX.....121.75___X____O_O________XOX_____121.50...X......O........XOX.....121.25...X......O........XOX.....121.00...X......O........XOX.....120.75...X......O........XOX.....120.50___X______O________XOX_____120.25...X......O....X...XOX.....120.00...X......3....X4..XOX.....119.75.X.X......OX...XO..XOX.....119.50.XOX......OXO..XO..XOX.....119.25_XOX______OXO__XO__XOX_____119.00.XOX......OXO..XO..XOX.....118.75.XOX......O.OX.XO..XOX.....118.50.XOX........OXOXO..XOX.....118.25.XO.........O.OXO..XO......118.00_X____________OXO__5_______117.75.1............O.O..X.......117.50................O..X.......117.25................O..X.......117.00................O..X.......116.75________________OX_X_______116.50................OXOX.......116.25................OXOX.......116.00................OXOX.......115.75----------------O-O--------115.50---------------------------115.25
Trading Applications
Liquidating positions
•
Target number of boxes. Liquidating a position after a certain number of boxes havebeen filled is a profitable strategy. The number of boxes is best derived from statisticalanalysis of historic tick data or by a visual estimation. It is obvious that you should watchthe stocks you want to use for day-trading over quite some time and hence you should getan understanding of where and how to take profits.
•
Reversals. Liquidating the position on a reversal is also a very simple concept which wehave already spoken about in a previous chapter. Having entered into the position, youliquidate when the first reversal occurs. You also have to try to simply enter and exit withthe reversals. If you have a fast enough access to the market and very quick reactions, thenthat strategy is highly profitable.
Pyramiding and day-tradingAs we see large columns in intraday data more often than in end-of-day data, we can be – in aliquid asset – aggressive in pyramiding.What we mean is that you can increase your position on each new box in the column that is filledin the direction of your position. Pyramiding in day-trading is dependent on your access to themarket and the liquidity. We can only suggest that you experiment and see if you can increaseand later liquidate positions fast enough. We have run aggressive pyramiding strategies in thehighly liquid currency markets where they work very well.
Real-time, manual P&FThe authors once got a group of traders to use manual p&f for futures scalping. The reason fordoing it manually was that the programmers were so stressed and behind schedule that they wereunable to create a special program. Although the charts can become quite big (because forscalping you use box sizes of one or two ticks), the manual charting worked beautifully!What you have to be careful of in rapid manual charting is to keep precision. In futures scalping,manual p&f worked extremely well, because it kept the traders completely focused on the pricemovements. This was possible because only one asset was being traded per trader (in our casestock index futures). Manual charting is, however, impossible if you try to do high-frequencytrading on several assets. Or if you try to do some testing involving a series of days’ worth ofdata. If, for instance, you divide the high-frequency data into 5 minute intervals, you get asample size of 120 per day in a market which is open for 10 hours. That is comparable to half ayear of daily data! The challenge with high-frequency data is the sheer amount of data.
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Software challengesIntegration of the data feed with the charting software
Because professional traders usually have custom software, which is connected to electronictrading platforms, the integration of a real-time feed (RTF) is normally structured in acustomized way. Point-and-figure for intense trading works so well that no effort should bespared in a professional set-up to integrate it with the trading front-end.As all software-developers are continuously improving their products, it is possible that by thetime you read this book, the three software packages we recommend will have real-time p&fready. We have seen real-time p&f with Updata Trader 2 and can recommend the product.Storage
From the incoming data stream the individual quotes have to be extracted and appended in realtime to the data file which is used as input for the p&f charting program. Because storage thesedays is so cheap, we recommend that you keep all data and establish a good historical database.Professional trading facilities alrready have such real-time databases, which can be easily linkedto the p&f program.If you do not have access to a real-time database that can be linked to your p&f program, youwill probably have to buy a software package like Updata, which performs real-time point-andfigure.Historical tick data
Most exchanges provide historical tick data or time&sales. The LSE’s service is good, but quiteexpensive for the private user. However, this should be seen in perspective: the cost of the LSEdata will be a tiny fraction of your commission costs. Eurex tick data is good and relativelycheap. Third party data – on the other hand – is expensive, but normally it is processed andtherefore erroneous or suspicious prices are eliminated.Converting the data
The time&sales data provided by the exchange has to be converted into a data series in order tofeed the point-and-figure application. Because point-and-figure is flexible whether you use arange of prices or one price, you can basically just extract the time-stamp and the price fromsuch a time&sales file, and this is by far the easiest way to go about it.Such files are delivered each day after market close. You split the files into the individualsecurities, throw the ones out that you do not need, and you then need to fuse the data of theindividual securities for the day into one file that covers a sequence of days. This file is thenused for doing the point-and-figure.Due to the amount of data, this conversion of the data has to be done by a program. Probablythe easiest is to program an Excel macro, whereby the entire file is imported and then the desired156
Trading Applications
data is copied to a new sheet. To our knowledge, there are unfortunately no standard conversionscripts that can be downloaded from the internet, as the use of historic tick data is not verywidespread.The amount of data is enormous – a typical daily file from the LSE is 25MB. The downloadablefile which is delivered in a compressed format only occupies about one tenth of that space, butin order to use the data on a computer you need to decompress it. You therefore need someserious disk space.There are also some private companies such as Olsen and TickData (see Appendix 3 on page249) which sell historical tick data. They allow you to choose formats which consume lessspace, such as 1 minute or 5 minute high, low, close formats.SummaryPoint-and-figure is ideally suited for fast trading styles.The important points in the implementation are of a technical nature, namely computers and datafeeds. If you trade either as a day-trader, scalper or market-maker and you have not tried pointand-figure, you might have been missing out on significant profits.
Extending point-and-figure to other marketsUp to now, our discussion has dealt almost exclusively with the charting of stocks, especiallyUK and European stocks. But p&f is much broader in scope. In addition to being an exceedinglyeffective tool for the analysis and forecasting of stock prices, it is applicable to all types ofbonds, currencies, commodities, stock options, and market indices. In fact, almost anything thatshows price fluctuations can be charted, including stamps, coins, real estate and art.The techniques for drawing Xs and Os are no different for stocks, bonds or options than theyare for futures contracts. Trend lines, price objectives and the long, short and stop-lossformations are also identical.If you know how to chart stocks using the traditional three-box reversal method, recognizesignals as they evolve, calculate vertical and horizontal price objectives, and draw trendlines, you have all the skills necessary for the successful charting and trading of any typeof investment.To illustrate this point, below and opposite are charts of the Gold and Oil index, which arecorrelated to the price movements of the underlying commodities.
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Chart 3.26 – Gold Index [.XAU]XAU / 3 box rev, log3/ 1988.02.01 to 2001.07.02157 ......|.....|........|........|......|..........|........|......|....|.........|..........|................|.......|....152 ......|.....|........|........|......|..........|........|......X....|.........|..........|................|.......|....148 ......|.....|........|........|......|..........|........|......23...|.........|..........|................|.......|....143 ________________________________________________X_______________XO______________________________________________________139 ......|.....|........|........|......|..........1O.......|......XO...|.........|..........|................|.......|....135 ......|.....X........|........|......|..........XOX...X..|......X6...|.........|..........|................|.......|....131 ......|.....X2.......|........|......|........B.XOX4..XA.|....7.XO...|.........|..........|................|.......|....127 ......|...C.XO.......|........|......|....X.X.XOX2XO..XO.|....XO1OX.X|.........|..........|................|.......|....124 __________XOXO__X_________________________XOX8XOCOXOX_XO____X_6OCOX9XO__________________________________________________120 ......|...XO1O..XO...|........|......|....7OXOXO|3.O56XO.|..X5XOX78OBOX........|..........|................|.......|....116 ......|...XO|O..XO...|........|......|....XOXOX.|..OXOXO.|..XOXAXO.O.OX3.......|..........|................|.......|....113 ......|...X.|3..XO...|........|......|..X.XO.OX.|..OXO9B.|..XOXOX....1XO.......|..........|................|.......|....110 ..X...|...B.|OX.8O...|........|......|..X6X..OA.|..OX7.OX|X.3O.OX....OXO....X..|..........|................|.......|....107 __X8____X_X__4X6X9______________________XOX__9X____O___OX1XOX__B_____2_OX___XA__________________________________________103 X.XO..|.9AX.|O5O7O...|........|......|..XOX..OX.|......OXOXOX...|....|.OX6X.XO.|..........|................|.......|....100 X5XO..X.8OX.|O.OXA...|........|......|..5O...OX.|......C.O.O2...|....|.4XO89XO.|..........|................|.......|....98 3O6OX.247O..|..OXO...|........|......|..X....OX.|........|.O....|....|.OXOXOXO.|..........|................|.......|....95 XO.OXBXOX...|..OXO..X|....X...|......|..X....O..|........|......|....|.O5OXOXO.|..........|................|.......|....92 X__9AOXOX______O_OX_X1__X_78____________X______________________________O_7XO_O____X___________________X_________________89 X..O.OXO6...|....OXOXO..3OXO..|......|4.X.......|........|......|....|...OX..O.|..X5......|...........XOX..|.......|....87 2....C15....|....OBOXOX.XOXOX.|.X....|XOX.......|........|......|....|...O...O.|..4O..X...|...........XOXO.|.......|....84 .....O|.....|....O.OXOXOXOXOXBX.78...|XOX.......|........|......|....|.......O.|..XO..XOX.|...........XOAO.|.......|....82 ......|.....|......OXOXOX4XOXOX3XOX..|3O........|........|......|....|.......B.|..XO..XOXO|.....X.....XO.O.|.......|....79 ___________________C_2_O_O6OXOXO6OXA__X______________________________________O____XO__AOXO______XO____