As you can see, closing above the opening istypical of bull trends. Figure 11-6 illustrates the opposite condi-tion. Closing below the open is characteristic of bear trends.Although these two illustrations depict daily price charts, thesame relationship is true on all time-frame levels. Figure 11-7shows these relationships on an intraday chart.Closings and Openings 123
lh gon Be
 
Figure 11-4. Closings near price bar lows on intraday 30-minute chart.
Developing a TradingSystem on the Open versusClose Relationship
Knowing that such relationships are important and that they tendto precede rallies and declines, is there a way in which they may beused for day trading? Based on my work I feel that there is. Themethod that I have developed based on the open versus close/openrelationships is called COR. Here is a synopsis of how it works.
= Following x consecutive price bars where the close is greaterthan the open, a buy signal is triggered and a long position initi-ated on the opening of the next price bar.
® Following x consecutive price bars where the close is less thanthe open, a sell signal is triggered and a short position initiatedon the opening of the next price bar.
= If there is a current position based on a previous signal, it isreversed and a profit or loss is taken.124 = Chapter Eleven
“lincecssestese sn oft aye
hieRRows Show. oays mw La ClosiNS PRICEY WAS Above The Ofer} i
: en ee EFigure 11-5. Closings greater than openings on a daily price chart.
4 the
 
® An initial stop loss (money management stop) is used.
= When a given profit amount has been reached (floor amount),then a trailing stop loss is used. The trailing stop loss is a givenpercentage of the open profit as measured from an open profitpeak. In other words, the market must retrace gains from anopen profit peak by a certain amount before the trade is stoppedout.
m If the stop is hit, the trade is closed out and no new position isentered until the next signal.
= A profit is taken either by being stopped out or by exit on thenth profitable opening.
= If neither of these conditions is met, then you exit on the close ofthe same day (MOC).
As you can see, this approach provides several alternatives, allideally suited for the day trader. It provides all the necessary ele-ments. When programmed on a daily live data feed, the software,Closings and Openings 125
 
Figure 11-6. Closings less than openings on a daily price chart.
such as Omega TradeStation™, will automatically generate theentry and exit points for you based on the input parameters.
Historical Records
Using tick-by-tick data, I back-tested the COR. My work indicatedthat the method works best on 20-minute price bars. I back-testedapproximately 569 trades in three different yearly time frames, asshown by the historical records in Figures 11-9 through 11-12.Figure 11-8 shows how the trades appear on an intraday chart. Seemy notations.
The best market for this approach is S&P futures, although themethod can be adapted for use in any active market that is suit-able for day trading. The parameters used for each of the tests arelisted on the accompanying historical printouts. You will note thefollowing general conclusions based on the above system testresults:126 = Chapter Eleven
810 MINUTE BAR
THREE Syceesrive 10 MinuTE ARS WHERE CLOSE -is sesow OPEN PRIOR To LARGE OEceive |
ceesrive allRee CaOse is ABveOPE PRIOR TO LARGE eaty
 
 
Figure 11-7. Open greater than close and open less than close on intraday chart.
= The usual long-entry successive bars is 3-4, while the usualshort-entry bars is longer, at about 5-8. This is a characteristic ofbull markets. In a bull market, valid sell signals tend to occurafter a longer string of closes below opens because the underly-ing or secular market trend is bullish. Reactions to the downsidetend to recover quickly, which means that a shorter number ofbars that show closes below opens will likely yield false signals.
= The initial stop loss amount is, of course, a function of marketvolatility. The very volatile S&P market of 1997 required a verylarge initial stop loss, whereas the relatively tame S&P market of1990 required a smaller initial stop loss. The 1997 stop loss wasabout four times the size of the 1990 stop loss. Please note thatin all day trading it is important to give the market plenty ofroom by using a larger stop loss.as opposed to a smaller stoploss. Unfortunately, this goes against the grain of many traderswho mistakenly think that smail stops are the best way to tradeprofitably.126 ~~ Chapter Eleven
    
0:6 TO NINUTE BAR SCS) TS COTi ee 1 THREE Successive 10 MinuTE BARS WHERE CLOSE -eT V2 is gesow GPEY PRion To LARGE OECCINE |
            
     
na
THREE Successive al.A neee Ceos€e Is ABove
Figure 11-7. Open greater than close and open less than close on intraday chart.
= The usual long-entry successive bars is 3-4, while the usualshort-entry bars is longer, at about 5-8. This is a characteristic ofbull markets. In a bull market, valid sell signals tend to occurafter a longer string of closes below opens because the underly-ing or secular market trend is bullish. Reactions to the downsidetend to recover quickly, which means that a shorter number ofbars that show closes below opens will likely yield false signals.
= The initial stop loss amount is, of course, a function of marketvolatility. The very volatile S&P market of 1997 required a verylarge initial stop loss, whereas the relatively tame S&P market of1990 required a smaller initial stop loss. The 1997 stop loss wasabout four times the size of the 1990 stop loss. Please note thatin all day trading it is important to give the market plenty ofroom by using a larger stop loss as opposed to a smaller stoploss. Unfortunately, this goes against the grain of many traderswho mistakenly think that small stops are the best way to tradeprofitably.126 = Chapter Eleven
RxH8_ 10 MINUTE BAR €THREE Syccessive 10 MinuvTé BARS WHERE CLOSE -is gecow GPEV PRioR To LARGE OECEINE -
R THREE succesrive GAWhERE CLOSE I$ ABEOPEN PRIOR TO LARGE RAlL
 
Figure 11-7. Open greater than close and open less than close on intraday chart.
= The usual long-entry successive bars is 3-4, while the usualshort-entry bars is longer, at about 5-8. This is a characteristic ofbull markets. In a bull market, valid sell signals tend to occurafter a longer string of closes below opens because the underly-ing or secular market trend is bullish. Reactions to the downsidetend to recover quickly, which means that a shorter number ofbars that show closes below opens will likely yield false signals.
= The initial stop loss amount is, of course, a function of marketvolatility. The very volatile S&P market of 1997 required a verylarge initial stop loss, whereas the relatively tame S&P market of1990 required a smaller initial stop loss. The 1997 stop loss wasabout four times the size of the 1990 stop loss. Please note thatin all day trading it is important to give the market plenty ofroom by using a larger stop loss as opposed to a smaller stoploss. Unfortunately, this goes against the grain of many traderswho mistakenly think that small stops are the best way to tradeprofitably.Closings and Openings 127
1/12/97 11 ‘S0am LSP on ae) S&P 500 Index - CME 11/19/97 10:50au
 
 
 
 
 
Figure 11-8. How the COR trades appear on a chart.SP_E99.ASC-20 min
01/10/97 - 11/28/97
 
 
Performance Summary: All TradesTotal net profit $ 111150.00 Open position P/L $ 0.00Gross profit $ 323950.00 Gross loss $-212800.00Total # of trades 300 Percent profitable 61%Number winning trades 182 Number losing trades 118Largest winning trade $ 12925.00 Largest losing trade $ ~-5875.00Average winning trade $ 1779.95 Average losing trade $ -1803.39Ratio avg win/avg loss 0.99 Avg trade(win & loss) $ 370.50Max consec. winners 10 Max consec. losers 5Avg # bars in winners 6 Avg # bars in losers 5Max intraday drawdown $ -26100.00Profit factor 1.52 Max # contracts held 1Account size required $ 26100.00 Return on account 426%
Performance Summary: Long TradesTotal net profit $ 38650.00 Open position P/L $ 0.00Gross profit $ 200625.00 Gross loss $-161975.00Total # of trades 203 Percent profitable 61%Number winning trades 124 Number losing trades 79Largest winning trade $ 7425.00 Largest losing trade $ +-5875.00Average winning trade $ 1617.94 Average losing trade $ -2050.32Ratio avg win/avg loss 0.79 Avg trade(win & loss) $ 190.39Max consec. winners 8 Max consec. losers 6Avg # bars in winners 6 Avg # bars in losers 6Max intraday drawdown $ -40600.00Profit factor 1.24 Max # contracts held 1Account size required $ 40600.00 Return on account 95%
Performance Summary: Short TradesTotal net profit $ 72500.00 Open position P/L $ 0.00Gross profit $ 123325.00 Gross loss $ -50825.00Total # of trades 97 Percent profitable 60%Number winning trades 58 Number losing trades 39Largest winning trade $ 12925.00 Largest losing trade $ -4425.00Average winning trade $ 2126.29 Average losing trade §$ -1303.21Ratio avg win/avg loss 1.63 Avg trade(win & loss) $ 747.42Max consec. winners 6 Max consec. losers 4Avg # bars in winners 5 Avg # bars in losers 3Max intraday drawdown $ -8000.00Profit factor 2.43 Max # contracts held 1Account size required $ 8000.00 Return on account 906%
Figure 11-9. Historical record COR in S&P from 1/10/97 through 11/28/97. Parameters:Long entry—3 bars close > open. Short entry—4 bars close < open. Initial stop loss is$5400. Floor amount is $1700. Trailing stop is 50%. Exit seventh profitable open or MOC.SP_E99.ASC-20 min
01/11/96 - 11/27/96
 
 
Performance Summary: All TradesTotal net profit $ 34250.00 Open position P/L $ 0.00Gross profit $ 54775.00 Gross loss $ -20525.00Total # of trades 80 Percent profitable 66%Number winning trades 53 Number losing trades 27Largest winning trade $ 5950.00 Largest losing trade § -1275.00Average winning trade $ 1033.49 Average losing trade $ -760.19Ratio avg win/avg loss 1.36 Avg trade(win & loss) $ 428.13Max consec. winners 9 Max consec. losers 3Avg # bars in winners 6 Avg # bars in losers 5Max intraday drawdown $ -3375.00Profit factor 2.67 Max # contracts held 1Account size required $ 3375.00 Return on account 1015%
Performance Summary: Long TradesTotal net profit $ 27925.00 Open position P/L $ 0.00Gross profit $ 41075.00 Gross loss § -13150.00Total # of trades 58 Percent profitable 66%Number winning trades 38 Number losing trades 20Largest winning trade $ 5950.00 Largest losing trade $ -1275.00Average winning trade $ 1080.92 Average losing trade $ -657.50Ratio avg win/avg loss 1.64 Avg trade(win & loss) $ 481.47Max consec. winners 7 Max consec. losers 3Avg # bars in winners 7 Avg # bars in losers 4Max intraday drawdown $ -3175.00Profit factor 3.12 Max # contracts held 1Account size required $ 3175.00 Return on account 880%
Performance Summary: Short TradesTotal net profit $ 6325.00 Open position P/L $ 0.00Gross profit $ 13700.00 Gross loss $ -7375.00Total # of trades 22 Percent profitable 68%Number winning trades 15 Number losing trades 7Largest winning trade $ 2325.00 Largest losing trade §$ -1275.00
- Average winning trade $ 913.33 Average losing trade $ -1053.57
Ratio avg win/avg loss_ 0.87 Avg trade(win & loss) $ 287.50Max consec. winners 4 Max consec. losers 2Avg # bars in winners 5 Avg # bars in losers 7Max intraday drawdown $ -2425.00Profit factor 1.86 Max # contracts held 1Account size required $ 2425.00 Return on account 261%
Figure 11-10. Historical record COR in S&P from 1/11/96 through 11/27/96. Parameters:Long entry—5 bars close > open. Short entry—6 bars close < open. Initial stop loss is$1200. Floor amount is $1100. Trailing stop is 40%. Exit tenth profitable open or MOC.jb.3cho SP_E99.ASC-30 min
Total net profitGross profit
Total # of tradesNumber winning trades
Largest winning tradeAverage winning tradeRatio avg win/avg loss
Max consec. winnersAvg # bars in winners
Max intraday drawdownProfit factorAccount size required
Total net profitGross profit
Total # of tradesNumber winning trades
Largest winning tradeAverage winning tradeRatio avg win/avg loss
Max consec. winnersAvg # bars in winners
Max intraday drawdownProfit factorAccount size required
Total net profitGross profit
Total # of tradesNumber winning trades
Largest winning tradeAverage winning tradeRatio avg win/avg loss
Max consec. winnersAvg # bars in winners
Max intraday drawdownProfit factorAccount size required
Performance$ 97775.00$ 236500.00
268
205$ 5550.00$ 1153.660.52
13
5$ -12950.001.70$ 12950.00Performance$ 97500.00$ 180875.00
196
158$ 5550.00$ 1144.780.52
14
5§ -11275.002.17$ 11275.00Performance$ 275.00$ 55625.00
72
47$ 4200.00$ 1183.510.53
8
4$ -15475.001.00$ 15475.00
11/03/95 - 11/28/97
Summary: All TradesOpen position P/LGross loss
Percent profitableNumber losing trades
Largest losing tradeAverage losing tradeAvg trade(win & loss)
Max consec. losersAvg # bars in losers
Max # contracts heldReturn on account
Open position P/LGross loss
Percent profitableNumber losing trades
Largest losing tradeAverage losing tradeAvg trade(win & loss)
Max consec. losersAvg # bars in losers
Max # contracts heldReturn on account
Short Trades
Open position P/LGross loss
Percent profitableNumber losing trades
Largest losing tradeAverage losing tradeAvg trade(win & loss)
Max consec. losersAvg # bars in losers
Max # contracts heldReturn on account
$ 0.00$-138725.00
76%63
-4825.00-2201.98364.83
aI
$ 0.00$ -83375.00
81%38
-4825.00-2194.08497.45
TU
$ 0.00§ -~55350.00
65%25
-3975.00-2214.003.82
UMA
38
12%
Figure 11-11. Historical record COR in S&P from 11/03/95 through 11/28/97.Parameters: Long entry—4 bars close > open. Short entry—-5 bars close < open. Initial stoploss is $3300. Floor is $800. Trailing stop loss is 50%. Exit third profitable open or MOC.Closings and Openings 131
& The floor amount is relatively small in all cases. In other words,for this system to make money you must begin using a trailingstop as soon as you have a few hundred points of profit, since itis not uncommon for S&P futures to trade in a large range, attimes taking away all of your open profit.
«= The trailing stop loss percentage is applied to the floor amount.In most cases, it has run about 50 percent, although in morevolatile markets you must be willing to give back a few moredollars given the wide intraday price swings.
= Exit on the nth profitable opening is an excellent strategy. Inmost cases, the seventh through the tenth profitable opening orMOC (whichever comes first) is the best strategy.
= Percentage accuracy has run from about 61 percent to a high of76 percent over the time frames tested.
m The average trade in all cases is very respectable for a day trade,while drawdown is reasonable for S&P futures.
Variation on the Theme
Asa slight deviation from the COR method, consider not exiting atthe end of the day. I realize that if you do this, then the CORmethod will no longer be a day-trading method; however, it mayyield considerably more profits and higher accuracy. As a case inpoint, consider the historical record shown in Figure 11-13. Thisreport shows what happens when the COR trade is not closed outat the end of the day. Instead, the trade is held until the twentiethprofitable open, or until it is stopped out or reversed by an oppo-site signal. As you can see, there is a dramatic improvement inresults and in accuracy.
Compare the historical results here with those covering thesame time span but with exit MOC or within the day on a stop(Figure 11-12), trailing stop loss, or the tenth profitable opening.The average profit per trade increases from $293 to over $638, whilethe accuracy increases from 67 percent to 77 percent. The total num-ber of trades decreases because positions are held for a longer peri-od of time, but the total net profit increases substantially.
This is a strong testimonial to the value of the method, but italso suggests that the day trader may, at times, wish to hold aposition in the expectation of a larger average profit. One way to“have your profit and keep it too” is to trade multiple units (i.e.,several contracts), taking day trade profits on one unit while hold-SP_E99.ASC-20 min
Total net profitGross profit
Total # of tradesNumber winning trades
Largest winning tradeAverage winning tradeRatio avg win/avg loss
Max consec. winnersAvg # bars in winners
Max intraday drawdownProfit factorAccount size required
Total net profitGross profit
Total # of tradesNumber winning trades
Largest winning tradeAverage winning tradeRatio avg win/avg loss
Max consec. winnersAvg # bars in winners
Max intraday drawdownProfit factorAccount size required
Total net profitGross profit
Total # of tradesNumber winning trades
Largest winning tradeAverage winning tradeRatio avg win/avg loss
Max consec. winnersAvg # bars in winners
Max intraday drawdownProfit factorAccount size required
Performance$ 29100.00§ 48450.00
99
66$ 2400.00$ 734.091.25
9
8$ -3275.002.50$ 3275.00Performance$ 28350,00$ 46600.00
97
65$ 2400.00$ 716.921.26
9
8$ -3275.002.55$ 3275.00Performance$ 750.00$ 1850.00
2
1$ 1850.00$ 1850.001.68
1
12$ -1475.001.68$ 1475.00
01/11/90 ~ 11/28/90 ~
Summary: All TradesOpen position P/LGross loss
Percent profitableNumber losing trades
Largest losing tradeAverage losing tradeAvg trade(win & loss)
Max consec. losersAvg # bars in losers
Max # contracts heldReturn on account
Open position P/LGross loss
Percent profitableNumber losing trades
Largest losing tradeAverage losing tradeAvg trade(win & loss)
Max consec. losersAvg # bars in losers
Max # contracts heldReturn on account
Summary: Short TradesOpen position P/LGross loss
Percent profitableNumber losing trades
Largest losing tradeAverage losing tradeAvg trade(win & loss)
Max consec. losersAvg # bars in losers
Max # contracts heldReturn on account
We
Sans
an
it Ur
Ur
0.00-19350.00
67%33
-1875.00-586.36293.94
0.00-18250.00
67%32
-1875.00-570.31292.27
0.00-1100.00
50%1
-1100.00-1100.00375.00
113
151%
Figure 11-12. Historical record COR in S&P from 1/11/90 through 11/28/90.Parameters: Long entry—4 bars close > open. Short entry—8 bars close < open. Initial stoploss is $1800. Floor is $900. Trailing stop loss is 50%. Exit tenth profitable open or MOC.jb.3cho
Total net profitGross profit
Total # of tradesNumber winning trades
Largest winning tradeAverage winning tradeRatio avg win/avg loss
Max consec. winnersAvg # bars in winners
Max intraday drawdownProfit factorAccount size required
Total net profitGross profit
Total # of tradesNumber winning trades
Largest winning tradeAverage winning tradeRatio avg win/avg loss
Max consec. winnersAvg # bars in winners
Max intraday drawdownProfit factorAccount size required
Total net profitGross profit
Total # of tradesNumber winning trades
Largest winning tradeAverage winning tradeRatio avg win/avg loss
Max consec. winnersAvg # bars in winners
Max intraday drawdownProfit factorAccount size required
SP_E99.ASC-20 min
Performance$ 47900.00$ 72750.00
75
58$ 7350.00$ 1254.310.86
13
20$ -6500.002.93$ 6500.00Performance$ 40375.00$ 65225.00
73
56$ 6750.00$ 1164.730.80
13
19$ -6500.002.62$ 6500.00Performance$ 7525.00$ 7525.00
2
2$ 7350.00$ 3762.50100.00
2
25§ -1475.00100.00$ 1475.00
01/11/90 - 11/28/90
Summary: All TradesOpen position P/LGross loss
Percent profitableNumber losing trades
Largest losing tradeAverage losing tradeAvg trade(win & loss)
Max consec. losersAvg # bars in losers
Max # contracts heldReturn on account
Open position P/LGross loss
Percent profitableNumber losing trades
Largest losing tradeAverage losing tradeAvg trade(win & loss)
Max consec. losersAvg # bars in losers
Max # contracts heidReturn on account
Summary: Short TradesOpen position P/LGross loss
Percent profitableNumber losing trades
Largest losing tradeAverage losing tradeAvg trade(win & loss)
Max consec. losersAvg # bars in losers
Max # contracts heldReturn on account
dU
inn
nM
Win
inn
0.00-24850.00
77%17
-2350.00-1461.76638.67
0.00-24850.00
77%17
-2350.00-1461.76553.08
0.000.00
100%0
0.000.003762.50
00
1510%
Figure 11-13. Historical record of the COR method holding positions beyond the day
time frame.134 ~~ Chapter Eleven
Summary
ing the remaining unit in accordance with the parameters I havecited.
This chapter discussed the importance of closing versus openingrelationships and presented the COR method for day trading.Specific rules of application were discussed. The assets and liabili-ties of the method were analyzed, along with specific historicaltest results. I also provided suggestions for maximizing results byholding positions for exit beyond the day time frame. Note thatthe COR method is a dynamic method that should be adjusted tomarket volatility and to individual markets.134 = Chapter Eleven
Summary
ing the remaining unit in accordance with the parameters I havecited.
This chapter discussed the importance of closing versus openingrelationships and presented the COR method for day trading.Specific rules of application were discussed. The assets and liabili-ties of the method were analyzed, along with specific historicaltest results. I also provided suggestions for maximizing results byholding positions for exit beyond the day time frame. Note thatthe COR method is a dynamic method that should be adjusted tomarket volatility and to individual markets.134 = Chapter Eleven
Summary
ing the remaining unit in accordance with the parameters I havecited.
This chapter discussed the importance of closing versus openingrelationships and presented the COR method for day trading.Specific rules of application were discussed. The assets and liabili-ties of the method were analyzed, along with specific historicaltest results. I also provided suggestions for maximizing results byholding positions for exit beyond the day time frame. Note thatthe COR method is a dynamic method that should be adjusted tomarket volatility and to individual markets.12
Gap Methodsfor Day Trading
Take a straw and throw it up into the air, youshall see by that which way the wind is.JOHN SELDEN
One of the more effective and specific methods of day trading is touse an opening price gap as the first indication of a possible trade.The basic method for trading, based on opening price gaps, hasalready been discussed in detail in my book The Compleat DayTrader. My discussion in this chapter will briefly review the basicgap method and will give you an additional gap method that is avariation on the theme.
A Day Trader’s Dream
My years as a trader and market analyst have convinced me thatthe more input a trader has in the formation of a trading decision,the more likely that the decision will be wrong. While this maynot sound right, the fact is that it is right. Traders cannot help buthave their wishes, emotions, expectations, fears, and dreams inter-
135136
Oops!
Chapter Twelve
fere with their decisions. Hence, the more a trader thinks about atrade—the more a trader analyzes a trade—the greater the proba-bility that the trade will be a loser. I do not mean to denigrate theimportance of the trader, yet facts are facts.
Unless you're an exceptional trader, you'll find that the moreyou spend in thought, the less you reap in profits. Traders don’tneed complicated systems; they need simple systems that don’trequire a great deal of judgment or thought. This is especially trueof day-trading methods.
Some day traders are addicted to their quote screens, watchingevery tick as if their lives depended on it. And unfortunately itoften does! My point of view is that if you want to sit and watchevery price tick, you ought to just buy or lease an exchange mem-bership and trade from the floor.
I believe that day trading should be a simple proposition, rea-sonably mechanical, and as objective as possible. Hence, the gaptrade and its variation (to be discussed in this chapter) is the daytrader’s dream.
The gap trade is a method that fits all of the important require-ments of a day trader. I was originally introduced to the gap tradeby Larry Williams, who deserves all of the credit for it. (Larrycalled it the “oops” signal for reasons that I'll explain later.)
The rules of application are simple. But before detailing themV'll define what I mean by a gap. In this case we are dealing with