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Spotting Breakouts As Easy as ACD - By
Matt Blackman
Trading guru Mark Fisher is no ordinary market player. The system he
teaches is the one he and his 75 plus traders at MBF Clearing Corp. use
to make a living on the New York markets day in and day out. Trading
everything from the basic commodities such as natural gas and crude oil
to volatile stocks, his traders brave the commodity pits or trade from
computer terminals. Does it work? Just ask anyone at Fisher's firm what
they think of the system and you'll get your answer. For more on his
trading strategies, please see Market Reversals and How to Spot Them.
Fisher describes his ACD system and how it works in a book entitled The
Logical Trader. Unlike many in the business of helping traders, he is
quite happy to share the system he uses because he believes the more who
use it, the more effective it will be.
Basically, his system provides A and C points for entry of a trade and B
and D points are exits, hence the name. It is a breakout strategy that
works best in volatile or trending markets with a special group of
stocks and commodities (those with high volatility work best). He
frequently uses natural gas and crude oil in his book as examples but he
also mentions commodities like sugar and a host of stocks. These
references are good tip-offs on which markets to use the ACD (Figure 1)
of the first 15-minutes of the trading day. An A Up (green line) occurs
when the index breaks 3-points above the opening range. An A Down (green
line) occurs when the price breaks below the opening range a set amount
and stays there. Note that an indicator like the relative strength index
can often help confirm buying and selling signals. A sell signal
together with negative divergence is a good sell signal confirmation
(see turn down on 8th day of the month in figure 1). If the index were
to put in an A Up and then break down below the opening range, the
trader would reverse his position when a C Down was put in, 0.5 points
below the opening range low.
A New System is Born While working on a system to trade as a graduate
student at the Wharton School of Business in the early 1980s, Fisher
observed the importance that the opening range held in setting the tone
for the trading day. In the case of crude oil (where the opening range
at the time was 10-minutes), the opening range was the high or the low
of the day between 17 and 23 percent of the time. If markets were truly
random and since there are thirty-two 10-minute periods in the trading
day, one would expect that the opening range would be the high or the
low 1/16 (or 6.25%) of the time (1/32 for high and 1/32 for low). Put
another way, the likelihood that the opening range will be either high
or low for the day is more than three times what one would expect if
market movements were truly random, as has been postulated by the Random
Walk myth. Fisher is not the only person to have discovered this fact. A
number of trading systems in use today rely on opening range for
providing clues to directional bias.
Here is how a trader uses the ACD system on a given day. First, he
monitors world markets about an hour or so before market open. This
helps him get a feel for what traders around the world are doing. Next,
it is important to read commodity reports. What reports are coming out
today that could have a strong influence on your market? A crude oil
trader, for example, would follow OPEC (Organization for Petroleum
Exporting Countries) meetings for any signs of a cutback or increase in
production quotas, weather reports affecting oil consumption, the weekly
oil inventory report, as well as the weekly natural gas storage figures.
Once the market opens, the S&P500 index trader, for example, follows
the first 15 minutes of the market, which is the opening range (OR) used
in this example, marking high and low horizontal lines on his chart for
the day. He waits for an A Up or A Down to occur. In this case, the
index moves above the OR and rises a further 3 points putting in an A
Up.
The trader places a stop order and buys the index at the A Up. A stop
loss would be set below the low value of the OR (B-exit) so that if the
market moved against him more than this amount once in the trade, he
would get out. Best to keep his money to trade another day. Assuming the
trade continued in his direction, if he were a day trader, he would exit
the trade near the end of the day.
A C Down occurs if the A Up signal is generated but then the index
trades down below the opening range. Using the lower limit of the OR
(B-exit), the trader would exit when this line is penetrated and reverse
his position (sell short) when a C Down was put in. A C Down (or C Up)
move is far more rare. They are interesting because the later in the day
they occur, the more intense the move. This is because the less time
traders have to exit a trade on a reversal, the more urgent they become
and hence the greater the volatility. This is one instance that staying
in a trade overnight might be a good idea, according to Fisher as
markets often experience gaps at the open of the following day.
Choose Your Time Frame
The beauty of the ACD system is that it works in almost any time frame.
The day trader might use a 5-minute period as his basis for trading,
while a longer-term trader might use daily data. For a longer
perspective, Fisher describes the Macro ACD. This still requires
reference to intraday data to determine opening range and A up or down
etc. except that now the longer-term trader keeps a tally of kept and
each day the new daily value is the score each day in a running total.
Fisher assigns daily values based on market action. For example, if the
equity puts in an A up early in the day and never trades below the
opening range, the day would earn a score of +2. If it puts in an A down
and never closes above OR, he gives it a -2. His daily scale ranges from
+9 to -9. A total is added while the oldest score 30 days ago is
removed.
On a day in which the running tally is increasing, the longer-term
trader would consider this bullish. The more rapidly the value is
increasing or decreasing, the more bullish or bearish the signal. A full
discussion of this strategy is beyond the scope of this article but
suffice it to say that points below the opening range low.
A New System is Born While working on a system to trade as a graduate
student at the Wharton School of Business in the early 1980s, Fisher
observed the importance that the opening range held in setting the tone
for the trading day. In the case of crude oil (where the opening range
at the time was 10-minutes), the opening range was the high or the low
of the day between 17 and 23 percent of the time. If markets were truly
random and since there are thirty-two 10-minute periods in the trading
day, one would expect that the opening range would be the high or the
low 1/16 (or 6.25%) of the time (1/32 for high and 1/32 for low). Put
another way, the likelihood that the opening range will be either high
or low for the day is more than three times what one would expect if
market movements were truly random, as has been postulated by the Random
Walk myth. Fisher is not the only person to have discovered this fact. A
number of trading systems in use today rely on opening range for
providing clues to directional bias.
Here is how a trader uses the ACD system on a given day. First, he
monitors world markets about an hour or so before market open. This
helps him get a feel for what traders around the world are doing. Next,
it is important to read commodity reports. What reports are coming out
today that could have a strong influence on your market? A crude oil
trader, for example, would follow OPEC (Organization for Petroleum
Exporting Countries) meetings for any signs of a cutback or increase in
production quotas, weather reports affecting oil consumption, the weekly
oil inventory report, as well as the weekly natural gas storage figures.
Once the market opens, the S&P500 index trader, for example, follows
the first 15 minutes of the market, which is the opening range (OR) used
in this example, marking high and low horizontal lines on his chart for
the day. He waits for an A Up or A Down to occur. In this case, the
index moves above Fisher has found this to work very well in providing
his traders with a macro look at the market in which they trade. Those
interested in learning more are advised to obtain a copy of The Logical
Trader or go to Fisher's website. He also offers a subscription service
to those who would like to get regular information on the values of A
and C points on various equities and commodities as well as details on
how to best use his system.
Tip of the Iceberg
The principles discussed here are just a glimpse of how the ACD system
works. Before using it, more reading and homework is necessary. The
system is also not a plug and play trading strategy that can be used on
any equity. Those that work best are highly volatile, very liquid (lots
of daily trading volume) and subject to long trends. Currencies tend to
work very well with the ACD system. Although the S&P500 index was
used as an example, Fisher did say in a telephone interview that it does
not work particularly well. He believes there are far better candidates
to trade with the ACD. It is also important to note that it does not
work very well on low volatility equities stuck in a trading range.
For those looking for new and interesting trading ideas to pursue and
who aren't afraid to do some work, the ACD system offers another way to
look at markets and a method of taking advantage of the daily volatility
and trends of stocks, commodities and currencies.
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