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5 Geometric Trading

5.2 Rectangle Trading Sjstem (Acme R)

I Exit Rules: Stop Loss

I. SeU all shares at or below the Lowest Low for StopBars -(ExitFactor* ATR- )

5.2.2 Short Signal

I Entry Rules

1. (HH4-LL4)/(HHi2-LLi2)<=0.3

2. (HH4-LL4)<-1.0*ATR3o

3. Sell Short the next bar ar or below LL4 - (EntryFactor * ATRjo)

[Exit Rules: Profit Target

1. Cover lialf of the position at or below the Low -(ProfitFactor *ATR3o)

2. Cover half of the position at or below the Low of ProfitBars ago -(2 * ProfitFactor * ATR30)

I ICxit Rules: Stop Loss

1. Cover all shares at or above the Highest High for StopBars + (ExitFactor * )

Iiic Ea.syLanjfuage code for the Acme R System is shown m Example 5.3: Kxample 5.3. Acme R Sysrem

Acme R System: Look for Rectangle Breakouts


{R Parameters}





{Filter Parameteri)


I llli-ili-n;lli(t1),


jlo-.illoii r.ii.iniihi.l

Equity(100000), RiskModel(3), RiskPercent(2.0), RiskATR(l.o), EntryFactor(0.25), DrawTargets(True);

Variables: N(O). ATR(0.0), ATRLength(20), TradeFilter(True), BuyStop(O.O), ShoTtStop(O.O), {R Variables) InRectangle(False), RectangleHigh(0.0), RectangleLow(O.O);

ATR = Volatility(ATRLength);

RectangleHigh = Highest(High, RectangleLength); RectangleLow = Lowest(Low, RectangleLength);

BuyStop = RectangleHigh * (EntryFactor * ATR); Shortstop = RectangleLow - (EntryFactor * ATR);

If FiltersOn Then

TradeFilter = ATR >= HininiumATR;

If TradeFilter Then Begin

{Calculate shares based on risk model)

N = AcmeGetShares(Equity, RiskModel, RiskPercent, RiskATR);

{Determine whether or rot we are in a rectangle}

InRectangle = AcmeRectangular(RectangleLength, RectangleRange,

RectangleFactor, RectangleRatio);

If InRectangle Then Begin

{Draw Entry Targets on the Chart} If DrawTargets Then

Conditioni = AcmeEntryTargetsCR", BuyStop, 0, 0, 0); BuyCAcme LE R") N Shares Next Bar on BuyStop Stop; [Draw Entry Targets on the Chart) If DrawTargets Then

Conditioni = AcmeEntryTargetsCR", 0, 0, Shortstop, O); SellCAcme SE R") N Shares Next Bar on Shortstop Stop; End; End;

5.3 Examples

5 geometric trading

the following charts are examples oftrades generated by the acme r sj-stem. each esample uses equity of $100,000 and the percent volatility model with a risk of20o.

5.3.1 airgatepcs

the chart in figure 5.2 is an illustration ofan acme r short entrj. once the low ofthe rectangle at 57.50 was broken, a short trade was entered, and the price fell five points in a period oftwo days. both the single-bar and mnlti-bar profit targets triggered on the same d. half ofthe position was covered near 55, and the rest was co\ered in the low 54s. the point ofthis example is to demonstrate the markets general pattern of extended consolidation periods followed by e; losive moves (note the double rectangles).

the stock bounced off ofits 50-day moving a\erage on august 17. the moving average is an area of natural support for a stock with a rising trend, so this area ofthe chart would also have been an excellent time to cover the entire position.

4:SA LAST-Daily D8/24/2Q01 Mov Avg 1 line 51.822 Acme Rectangle Acme R Strategy -IDDO

17 "

56.000 57.000 56.000 -55.000 54.000

5.2. aik;:itL- I4"S RiVLmnU-

5.3 examples

figure 5.3 is an example ofan intraday rectangle for rambus (rmbs:nasdaq) on august 2s, 2001. one might assume that a stock that gaps up on the day would consolidate and resume its rise later in the afternoon. our testing shows that a stock in consolidation isjust as likely to break in the opposite direction, regardless ofthe opening gap bias.

with rectangles, it is important to stay neutral on the e\entual direction of the stock. ifjou are plajdng rectangles intraday, then monitor the charts ofthe associated market and sector indices to determine whether or not the stock moves sjflchronously with the indices. for esample, with rambus, one would monitor the phlx semiconductor sector index (sox) along witii the nasdaq composite index.

although the acme r sj-stem includes a volatuity filter, the r sj-stem is self-checking because the definition of a rectangle requires a large range preceding it in order to satisfy the aspect ratio requirement. for intraday trading, the rectangle wiu almost always occur in the middle ofthe day after the moming trend has developed. then, later in the afternoon, the stockwiu continue eitherin the direction ofthe moming trend or reverse completely. so, we split the trading day into three segments and use the rectangle to represent the middle segment as a reversal tool


Acme LER

14 40 8/2? llO 12.50 m:OD

11:00 n 10 13:20 14:30

Figure 5.3. rambus rectangle

5.3.3 Electro-Optical Engineering

This is our iwonte rectangle of aU time, as shown in Figure 5.4. We emphasize the point about not using trend filters for rectangles because stocks tend to move up above rectangles at bottoms and explode down out ofredangles at tops (refer to Figure 5.2). Here, the rectangle was imder the MA50 at the breakout.



Fure 5.4. Electro-Optical Engineering Rectangle 53.4 Stericycle

Figure 5.5 is an example ofmulliplidly-maltiph rectangles and multiple signals eh coming together to form a powerful move.

5.4 Double Bottom

Much ofthe technical analjsis hterature places geometric patterns into either bullish or bearish categories. For example, the double bottom is considered to be a bullish formation. Our stance is that a double bottom is buUish only ifit works. The problem with bottoms and tops is that by the time they can be recognized, the good trade may have aheadjoccurred. Ifastockhas established alow sewral bars ago, then \ bar thereafter approaching that low is a potential double bottom. The question for the trader is: How must the price action dewlop to that in fact a double bottom has occurred, and how soon can a long trade be entered? Ifthe price breaks below the previous low, then should the trader go short on that breakdown?

The answer is that the trader requires a bullish bar pattem to trier a long entrj. When price tests a previous low, than that is a possibly buhish Test pattem. Since a Test bar must close near the high of its range, this is the first sign that a double bottom has probably been estabhshed, and only than can a long entrj be considered. The pattem does not have to strictly be a Test pattem, but simply a bar that ctoses near the high.

In Figure 5.6, look at the last bar offhe double bottom. The line can only be drawn once the low ofthe d has been estabhshed, and that is not known until the end of the d (although confidence increases as the end of the day approaches) If one thinks ofthe optimal entrj imder intraday conditions, then the trader must be alerted to the condition that a double bottom is possibly being formed based on the current low ofthe day, i.e., the double bottom line can be drawn in real-time throughout the day and redrawn as the low of the day changes, as long as the low stays within the parameters ofwhat constitutes a double bottom.

riKHiri.S. M.llll.ll, Ifv

IlKiiu-S.l>. I)......I.-II.

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