5% aanct ofWone Aon

•Source. Thomas V Graer. B,\¹de Brorseaand Shi-Mlin Liu, "Slippage Costj ol a UiTechnical Trader." TetimiwtAna cfSioda & Com-modttJesOinuary 1991)

Stocks are increasing, show reduced volatihty Many experts have theorized that the high interest rate yields seen in the 1980s, as well as the high precious metals prices, are a very unusual event not to be repeated often.

Some markets do not have a high or low price in the normal sense of a phjsical commodity; therefore, they do not contain volatility pattems directly proportional to price level. For example, foreign exchange maikets have low volatility when they are at levels perceived as the fair value or equilibrium. Prices increase in volatility when thej move either up or down from this level, because any change away from the norm is considered unstable.

Crude oil represents a different phenomenon because it is a confrolled maricet. While currencies may become volatile as they move away from equilibrium, they win become quiet at a new price if that is perceived as reasonable by the maiket. This is not the ease with oil, because the producing counfries continue to drive prices back to their target levels by confrolling the supply. Therefore, the farther prices decline from the producers desired price, the more of a straggle exists between fair value and confrolled price, resulting in higher volatility The dj-namics of higher oil prices are similar to other physical commodities. The dsy trader must alwajs seek opportunities in potential volatilitj

APPLICABILITY OF TRADING TECHNIQUES

Most traditional methods of technical analjsis, in particular frend-followmg sjstems, are not used for trading intervals of less than 3 dsjs; however, the price fluctuations during these shorter periods are nearly all technical. An economic analjsis of supply and demand caimot be relevant over such a short time span; that spproadi can only be used for establishing longer-term frading policy. Other than the immediate reactions to ovemight cash maikel movement, anticipated daily price changes based on political events and weather have not been successfully measured., however, techniques used for dsy trading can be spplied to slightly longer periods of a few dsjs. The principles used in these time frames are very different, and the number of data points used in the calculations reflect on the final reliability. For example, a 3-dsy daily moving average relies on only three data points for its decision of the direction of the frend; therefore, it will be very erratic.

Both dsy trading and short-term trading are concerned with timing to improve entry and exit points. The mosl common way to accomplish this is by a simple form of pattem recognition based on values relevant to the short time frame. From the floor traders viewpoint, only the most obvious recent key levels are important. Todsys price movements are compared with todsys opening price, high and low, yesterdsys closing price, yesterdays high and low, last weeks high and low, very memorable older support and resistance points, and finally, life-of-contract high and low When the same price satisfies more than one condition, there is greater confidence in the importance of that point.

The importance of noise is also very different for the dsy trader and the frend follower. Noise, the underljing erratic movement of prices, is not a significant issue for the position frader looking to follow interest rates to high levels over the next year. But it is very important for the dsy frader, because the frend component of price movement is very small over a 24-hour period compared with the noise. This makes it inpossible, using the ordinarj frend-following tools, to decide whether a move up over 15 minutes will begin a frend or whether it is simply part of the more common maricet noise.

Time-of-Day Pattems

Time-of-day and short-term patterns are combmed m the most popular forms of day trading; the tjpes of pattems have been discussed in Chapter 15. There are natural occurrences during the trading day that make certain times more important than others. The

opening gap and the continuation of that direction usually take the first 15 to 20 minutes of the trading day, as does the reaction to the U.S. economic reports that are released at 7:30 A.M. in Chicago. After that, a price reversal occurs and a trading range is established, which lasts until the middle of the session. The midmoming period, which may maiginally expand the initial trading range, tends to include low volume because many of the orders originating off the floor (called paper) are exhausted near the open; floor traders take this opportunity for a break, further reducing liquidity

Following midday, activity steadily increases and the existing daily range is tested. It is common for most day traders to buy the bottom of the range and sell the top. A break of either support or resistance after midday is considered a major directional change; traders quickly diift to the direction of the breakout with the expectation of holding that position for the balance of the day. A more thorough analjsis of time is shown in Figure I6-I. This chart, created by Walt Bressert, uses the important recent highs and lows and is very specific about relationships between the developing range, the pre\ious days range, and the time of day. Readers may want to compare Bresserts relationship with those found in Chter 15. Intraday highs and lows that correspond to key levels found on charts-such as channel support and resistance, and head-and-shoulders objectives-are also likely to have increased importance.

Intraday versus Overnight Price Ranges

Holding a position overnight involves maigin and, above all else, greaier rid;, it also increases the opportunity for laiger profits. In moderately active maitets, the opening gap, the difference between the prior close and the nexl open, can be one-third to one-half the size of the normal trading range. Maitets that are traded in one time zone but reflect the business of a completely different geographic region, have larger sjstematic gap openings. For exanple, the Nikkei 225 is traded at the Chicago Mercantile Exchange, but the Nikkei reflects the value of the Japanese stock maitet. While the day session in Chicago is open from about 7:00 A.M. to3:00P.m. local time, the time in japan is 10 hours earlier, 9:00 P.M. to 5:00 A.M., a period when there is no business activity in Asia. When Chicago opens, it musl immediately reflect the price of the previous closing session in japan; therefore, it gaps to that level. This same situation happens to a lesser degree for European currencies, which are actively fraded on Chicagos IMM. When those maitets open at 7:20 A.M., Europe is coming bact from lunch and all local economic news has alreadj been absorbed into the maitet.

In Table 16-3 and Figure 16-2 we see that the currencies and metals, representing markets actively traded 24 hours, have the laigest overnight gaps. Viewing world maitets only during the U-S. business hours can put a frader at a disadvantage and force him to deal with unpredictable, unconfrollable risks. This has prompted many fraders to watch the maitets through both day and night. Most computerized sjstems have no frouble continuing their calculation through various sessions.

Point-and-Figure for Short-Term Trading

Point-and-figure charting has been a primarj tool of day traders for many years. Using the minimum price movement as the box size and a 3-box reversal, many fraders will keep a continuous, although lengthy, chart of day-to-day price movement. Buy and sell signals can be taken in the standard manner, but day traders are most likely to use these charts for identifjing countertrend support and resistance levels, intraday point-and-figure, as well as moving averages, often show frequent changes of direction before a new buy or Sell sig. nal occurs, even when the minimum box size is used. Trend methods are best applied to short-term overnight positions in which the size of the move is much laiger.

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