Stocks & Commodities V. 7:10 (372-374): Trading close-to-close patterns by Toby Crabel

Trading close-to-close patterns by Toby Crabel

Do the relationships between day-to-day closing prices predict the next day's price moves and, if so, is

it possible to isolate these profitable chart patterns and incorporate them as entry signals in a larger trading system? In pursuit of these answers, I have tested all two- through five-day close-to-close patterns in the T-bond futures market from 1978 to 1987 (Figure 1) and discovered the beginnings of some excellent low-risk entry techniques. My tests assumed that trades were entered on the last close of the pattern and exited on the next day's close. Stops were not used.

Figure 2 is an example of the --++ pattern listed as number 24 in Figure 1. The pattern is two lower closings followed by two higher closings, all relative to the close immediately preceding it. Figure 1 shows this pattern is most profitable as a sale. Entry is taken on the close of the last day which, in this case, is higher and the trade is exited on the next day's close.

...if a wide spread da y occurs on the last da y of the close-to-close pattern and the sell is taken on the higher open there is a dramatic impro vement ...85 % profitabilit y.

The % Profit column in Figure 1 indicates a pattern's intraday "bias" or tendency to move in a particular direction and the Gross Profit column (before slippage and commission) verifies just how effective these trades are. The larger these numbers, the stronger the bias. A strong bias is the signal to further pursue system development.

The T-bond chart in Figure 3 illustrates five close-to-close patterns, of which a, c and e were profitable

Article Text 1Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 7:10 (372-374): Trading close-to-close patterns by Toby Crabel

FIGURE 1

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Stocks & Commodities V. 7:10 (372-374): Trading close-to-close patterns by Toby Crabel

FIGURE 2: Two lower closings on days 2 and 3, followed by two higher closes on days 4 and 5 create a --++ pattern. To the right is the same pattern as it would appear on a conventional bar chart.

FIGURE 3: Close-to-close patterns a, c and e were profitable while b and d were losers.

Stocks & Commodities V. 7:10 (372-374): Trading close-to-close patterns by Toby Crabel

and b and d were losers.

The general results from close-to-close patterns are less impressive than that of open-to-close patterns (see "Price pattern studies," Stocks & Commodities, September 1989). Because of the marked difference, I concluded bias breaks down the longer the position is held. Risk increased dramatically as indicated by the substantial drop in close-to-close gross profits compared to open-to-close patterns.

When a high profitability close-to-close pattern precedes an open-to-close pattern, there are some interesting results. For example, pattern 24 in Figures 1 and 2 was profitable 56% of the time when selling, with $16,730 gross profits. That, alone, is not that impressive. But, if you wait for the next day's open, sell if it is higher and exit on the close, the results improve to 66% profitability and $22,244 gross profits.

Likewise, if a wide spread day occurs on the last day of the close-to-close pattern and the sell is taken on the higher open there is a dramatic improvement—85% profitability with $ 13,837 gross profits from a third as many trades as pattern 24.

An 85% winning system is quite an accomplishment. A variation of this sale places a seven-tick stop above the open and has resulted in 52% winners with $10,500 gross profits. Most notably, on average, winning trades were four times the size of losers. Although it may be difficult to appreciate the value of a system with only 50% winning trades, a risk as small as seven ticks makes 50% a reasonable amount.

The patterns tested here can be used for indications of bias every day. Normally, it is not prudent to trade against the bias unless information clearly suggests otherwise. In addition, these basic patterns provide a sound base for further research.

Toby Crabel is a CTA and AP with RB&H Commodities and a principal in Toby Crabel & Associates. A former trader at the CME and CBOT, he now edits Market Analytics, 30 S. Wacker Dr., Suite 1912, Chicago, IL 60606, (800) 621-2503, ext. 1410.

ReferencesCrabel, Toby [1988], "Opening Range Breakout, "Stocks & Commodities, Volume 6: Market Timing, pp.

337,366,462.Crabel, Toby [1989], "Opening Range Breakout," Stocks &Commodities, April-July.Crabel, Toby [1989], "Price pattern studies, " Stocks & Commodities, September.

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