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CISCO Futures
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Background

AESearch: Searching the Advice Engine Data

CISCO Futures© 2001, 2006

The Advice Engine Report Part 1 lists all futures that are in balance as an alert, a guide for the next day's trading. Some of those balances may breakout. These breakouts occurred because the Overlay Limit price was exceeded. Once broken out, that market may run (trend) or return to balance (a false breakout). If you are trading one or more of these breaking out markets your trade management needs to apply some risk technique: trailing stop, target price or guidance by market observation, etc. You MUST have a plan for risk!

AESearch is a drawdown methodology that permits you to study various risks on the past Advice Engine Report data. This risk variation is keyed to the octant, one-eighth the range of the Upper Limit - Lower Limit. The octant has long been used in Auction Value Theory analysis as a beginning estimate of risk. Markets change from highly excited, (large volatility with wide ranges) to quiescent (low volatility with narrow ranges). Where is the market you are trading today within that gamut? Drawdown studies start with the standard octant. You can examine a given market slice (say two months) using risks of 10% of the octant to 190%. Your two primary tools are risk (some percent of the octant) and the maximum excursion of price post breakout that day (Potential). You then have the two variables you need, risk and the Potential to risk ratio. You can examine any market over any timeframes you wish so long as that market appears in the Advice Engine Report.

Advice Engine Report data dates from November 1, 2000 (001101). Commodities go in and out of favor in all trading markets. This search capability can answer several questions about the behavior of a commodity. e.g. How often does it trade?, what is the average risk?, what is the average Potential?, what is the Potential to risk ratio?, which breakouts trade better, 5 day, 10 day, 15 day or 20 day? Also, which commodity is better to trade and is the long term behavior of a future the same as it's shorter timeframe behavior (has it changed recently)?

The data comes directly from the Advice Engine daily Reports. The user can pinpoint past performance. For instance, the Dow Jones (DJ) is examined for the short period May 1, 2001 through May 11, 2001. A summary table from AESearch:

Limitations
This function is designed to examine a particular delivery, about 90 calendar days. For instance, the SP Dec 03 would be from Sep 11 through Dec 11.
You may group several deliveries and to find a composite risk. This technique may be required for commodities that roll every month, such a petroleums.
The search function assumes the data is reported in decimals. Non decimal data such as T-bonds will not be exact. 

 

      Statistical Summary for DJ  010501 thru 010511

A study of Potential-to-risk for 5, 10, 15 & 20 day Overlays.

           Total Balances        26
           Total Breakouts       11
           Total Risk          5178
           Average Risk         470
           Total Potential     3230
           Average Potential    293
           Av Pot`l to Risk    0.62
          DYS      5     10     15     20
          B-O      4      3      3      1
 
          Rsk   1251   1550   1764    613
          AvR    312    516    588    613

          Pot   1200    900    980    150
          AvP    300    300    326    150

          P/R   0.96   0.58   0.55   0.24


     Legend:
      Balances are number of days starting in balance for each timeframe.
      Breakouts are number of days that broke out.
      Risk is the standard Octant risk from the Overlay.
      Potential is the maximum gain between entry and close.
      In the table:
        DYS = number days in the Overlay timeframe.
        B-O = number of breakouts for that Overlay.
        Rsk = Total risk for that Overlay.
        AvR = Average risk for that Overlay.
        Pot = Total Potential for that Overlay.
        AvP = Average Potential for that Overlay.
        P/R = Average ratio of Potential to Risk.
Normally, a study like this would cover a longer period of three to six months. For the short period at hand, eight trading days, the DJ showed 26 balances out of a posssible 32 (4 per day). Of the 26, 11 broke out (42 percent of the time). The average risk per trade is $470 and the average Potential (best possible result) is $293.

Breaking the table down by the four Overlay periods (5, 10, 15 and 20 days), the average risk is lowest for the 5 day, the average Potential is little different between 5, 10 and 15 days and consequently the Potential to risk ratio is best for the 5 day. If this were a representative study a trader's strategy is clear, trade the 5 day breakouts. In fact, if one covers the period November 1, 2001 through July 30, 2001 the same strategy is found, except the Potential to risk ratio is a whopping 3.40.

A reasonable question might be whether the 9 month average is valid for more recent times. Doing the search for May 1 through July 31 shows a 5 day Potential to risk of 3.96. So yes, the DJ is still offering exceptional opportunity.

AESearch is a true research tool. The raw data, the Advice Engine Report, is built on the firm foundation of Auction Market Theory. The Potential to risk ratio is illustrated, but there are many trading answers to be found from AESearch. Just a few ..1) how often is this market in balance ..2) what percentage of balances break out ..3) what is the average Potential ($) per trade ..4) does this market favor the 5 day Overlay or the 10 day Overlay ..5) is the market offering more or less Potential as time goes on ..6) do all four timeframes break out on the same day, or just the shorter ones ..7) does this market tend to runs--periods of Longs followed by Shorts ..8) if so, when did the latest run start.

Other questions will occur in ones background study of a market. But the Advice Engine data is all contained in one accessible list. One knows from Auction Market Theory that the strategy is to follow value. These data make it possible to take the step from strategy to model, to trading decisions. The first step in this process is to gain enough market understanding to make intelligent decisions.

Using the "Search Advice Engine History Data"
Inputs are symbol (DJ), beginning date (001101), ending date (010731) and whether to output all trades plus the statistical table (Detail) or just the statistical table (Summary) alone.

Output is arranged to show balances starting on the margin. The first is from the May 1, 2001 Advice Engine list for the DJ, June 2001 contract, five day Overlay. Included are the breakout points, risk and Market Profile Value Area. The five day Overlay did break out the next day, May 2, and appears in the indented line. Next listed is the 10 day Overlay, which also broke out. The next three lines from the Advice Engine of May 2, had no breakouts on May 3.

At the bottom of the list, the statistical data, listed above, carry information on the balances, breakouts, Potential collectively and also broken down by the Overlay periods. These data offer an exceptional overview of market behavior, available nowhere else. 


       Advice Engine:  Breakout Search of DJ from 010501 through 010511.

          Mo Yr ND    Long   StopL     Short   StopS  Risk $  Risk Pts VaU    POC    VaL
010501 DJ  6 01  5  109300  108937    106400  106763     363    363 108830 108390 107200
  010502 DJ  6 01  5   Risk$ =    363   Tde-Dir =  LONG   Potential$ =   250
010501 DJ  6 01 10  109300  108750    104900  105450     550    550 108830 108390 107200
  010502 DJ  6 01 10   Risk$ =    550   Tde-Dir =  LONG   Potential$ =   250
  
010502 DJ  6 01  5  109500  109137    106600  106963     363    363 109350 109050 108590
010502 DJ  6 01 10  109500  108925    104900  105475     575    575 109350 109050 108590
010502 DJ  6 01 15  109300  108762    105000  105538     538    538 109350 109050 108590

010503 DJ  6 01  5  109500  109225    107300  107575     275    275 108040 107750 107550
  010504 DJ  6 01  5   Risk$ =    275   Tde-Dir =  LONG   Potential$ =   600
010503 DJ  6 01 10  109500  108925    104900  105475     575    575 108040 107750 107550
  010504 DJ  6 01 10   Risk$ =    575   Tde-Dir =  LONG   Potential$ =   600
010503 DJ  6 01 15  109300  108762    105000  105538     538    538 108040 107750 107550
  010504 DJ  6 01 15   Risk$ =    538   Tde-Dir =  LONG   Potential$ =   800
  
010507 DJ  6 01  5  110000  109612    106900  107288     388    388 109800 109650 109350
010507 DJ  6 01 10  110000  109362    104900  105538     638    638 109800 109650 109350
010507 DJ  6 01 15  109900  109287    105000  105613     613    613 109800 109650 109350
  010508 DJ  6 01 15   Risk$ =    613   Tde-Dir =  LONG   Potential$ =    30
  
010508 DJ  6 01  5  110000  109612    106900  107288     388    388 109100 108850 108630
010508 DJ  6 01 10  110000  109550    106400  106850     450    450 109100 108850 108630
010508 DJ  6 01 15  109900  109287    105000  105613     613    613 109100 108850 108630
  
010509 DJ  6 01  5  110000  109612    106900  107288     388    388 109010 108850 108310
  010510 DJ  6 01  5   Risk$ =    388   Tde-Dir =  LONG   Potential$ =    50
010509 DJ  6 01 10  110000  109575    106600  107025     425    425 109010 108850 108310
  010510 DJ  6 01 10   Risk$ =    425   Tde-Dir =  LONG   Potential$ =    50
010509 DJ  6 01 15  109900  109287    105000  105613     613    613 109010 108850 108310
  010510 DJ  6 01 15   Risk$ =    613   Tde-Dir =  LONG   Potential$ =   150
010509 DJ  6 01 20  109900  109287    105000  105613     613    613 109010 108850 108310
  010510 DJ  6 01 20   Risk$ =    613   Tde-Dir =  LONG   Potential$ =   150

010510 DJ  6 01  5  110000  109775    108200  108425     225    225 109760 109550 109370
  010511 DJ  6 01  5   Risk$ =    225   Tde-Dir = SHORT   Potential$ =   300
010510 DJ  6 01 10  110000  109612    106900  107288     388    388 109760 109550 109370
010510 DJ  6 01 15  110000  109375    105000  105625     625    625 109760 109550 109370
010510 DJ  6 01 20  110000  109375    105000  105625     625    625 109760 109550 109370

010511 DJ  6 01  5  110000  109762    108100  108338     238    238 108610 108440 108060
010511 DJ  6 01 10  110000  109612    106900  107288     388    388 108610 108440 108060
010511 DJ  6 01 15  110000  109375    105000  105625     625    625 108610 108440 108060
010511 DJ  6 01 20  110000  109375    105000  105625     625    625 108610 108440 108060


      Statistical Summary for DJ  010501 thru 010511

A study of Potential-to-risk for 5, 10, 15 & 20 day Overlays.

           Total Balances        26
           Total Breakouts       11
           Total Risk          5178
           Average Risk         470
           Total Potential     3230
           Average Potential    293
           Av Pot`l to Risk    0.62
          DYS      5     10     15     20
          B-O      4      3      3      1
 
          Rsk   1251   1550   1764    613
          AvR    312    516    588    613

          Pot   1200    900    980    150
          AvP    300    300    326    150

          P/R   0.96   0.58   0.55   0.24


     Legend:
      Balances are number of days starting in balance.
      Breakouts are number of days that broke out.
      Risk is the standard Octant risk from the Overlay.
      Potential is the maximum gain between entry and close.
      In the table:
        DYS = number days in the Overlay.
        B-O = number of breakouts for that Overlay.
        Rsk = Total risk for that Overlay.
        AvR = Average risk for that Overlay.
        Pot = Total Potential for that Overlay.
        AvP = Average Potential for that Overlay.
        P/R = Average ratio of Potential to Risk.


   A Longer View of the DJ for Daytrading: the 5 Day by Contract

               Risk   Potential   Pot/Risk   #Trades
      Mar 01    400     1395        3.49        4
      Jun 01    323     1043        3.23       20
      Sep 01    274     1054        3.85       15
      Dec 01    378      612        1.62       19
      Mar 02    342      637        1.86        4
      Jun 02    251      348        1.39        6
      Sep 02    387      980        2.53        7
      Dec 02    391      879        2.25       17
      Mar 03    307      527        1.72       15
      Jun 03    307      958        3.12        6
      Sep 03    270      708        2.62       16
      Dec 03    186      351        1.92       22

       Average  318      791        2.49       12.6 (trades per quarter)

      A three year study provides a good picture of the variability
      of this market over time.  The risk changes much less than the
      potential. Most important is the potential to risk ratio (P/R).
      P/R varies from 1.39 to 3.85, or nearly 200 percent. A low P/R
      period like the December 2002 contract through June 2003 might 
      be a time to seek out markets with more potential.
A Statistical Study of SP vs. DJ A daytrader is concerned primarily about 1) opportunity and 2) risk. The Advice Engine search of the two futures over an eleven month period is in the table below. 

  
       Statistical Summary for SP  001101 thru 010930

 A study of Potential to risk for 5, 10, 15 & 20 day Overlays.

  Total Balances       307
  Total Breakouts      140
  Total Risk        208111
  Average Risk        1486
  Total Potential   355675
  Average Potential   2540
  Av Pot`l to Risk    1.71

 DYS      5     10     15     20
 B-O     63     41     19     17

 Rsk  66868  64015  37318  39910
 AvR   1061   1561   1964   2347

 Pot 160325  99875  54950  40525
 AvP   2544   2435   2892   2383

 P/R   2.40   1.56   1.47   1.02



  
       Statistical Summary for DJ  001101 thru 010930

 A study of Potential to risk for 5, 10, 15 & 20 day Overlays.

  Total Balances       383
  Total Breakouts      161
  Total Risk         71988
  Average Risk         447
  Total Potential   167260
  Average Potential   1038
  Av Pot`l to Risk    2.32

 DYS      5     10     15     20
 B-O     66     51     27     17

 Rsk  21767  23411  15137  11673
 AvR    329    459    560    686

 Pot  69760  50400  26490  20610
 AvP   1056    988    981   1212

 P/R   3.21   2.15   1.75   1.77
Over the history of Advice Engine trading from November 2000 through September 2001 the S&P and Dow Indexes compare: 

                           SP            DJ
    Breakouts             140           161
    Average Risk$        1486           447    
    Average Potential$   2540          1038
    Potential to Risk    1.71          2.32

    Best Timeframe (days)   5             5
    Breakouts              63            66
    Average Risk$        1061           329
    Average Potential$   2544          1061
    Potential to Risk    2.40          3.21

    It is possible to list the 10, 15 and 20 day tables, but clearly,
    the 5 day is best from a reward-to-risk comparison.
   

As of the end of 2003 the comparison for the 5 day market is:

  Del    Rsk-DJ  Rsk-SP   Potl-DJ  Potl_SP  P/R-DJ  P/R-SP  #Tds-DJ  #Tds-SP
 Mar 01     400    1469      1395      125    3.49    0.09        4        1
 Jun 01     323    1246      1043     2775    3.23    2.65       20       19
 Sep 01     274    1154      1054     2375    3.85    2.64       15       24
 Dec 01     378    1121       612     1786    1.62    1.80       19       15
 Mar 02     342    1260       637     1583    1.86    1.52        4        3
 Jun 02     251     884       348     1358    1.39    1.86        6        3
 Sep 02     387    1434       980     3127    2.53    2.58        7        6
 Dec 02     391    1222       879     1990    2.25    2.26       17       10
 Mar 03     307    1026       527     1505    1.72    1.97       15       17
 Jun 03     307     981       958     2658    3.12    3.19        6        3
 Sep 03     270     964       708     1548    2.62    2.05       16       17
 Dec 03     186     664       357     1110    1.92    2.25       22       25

 Average    318    1119       792     1828    2.49    1.63       12.6     12.9

Note: Conversion to $: DJ x 1, SP x 2.5 (both full contracts). The ratios of
of Potential to Risk are independent of the dollar conversion.

A Potential to Risk for DJ of 2.49 vs SP of 1.63 shows DJ to be 52 percent
better [(2.49 - 1.63)/1.63 x 100].  On the face of these measures, a trader
has a better play in the DJ.
Which to Trade?
Trading decisions are often qualitative and personal. The data shows approximately the same number of trading opportunities for each. The three year study shows the slow periods, e.g. December 2001 through September 2002, to be about the same for both.

An important factor is the risk capital required. DJ takes only about one-third that of SP. The SP Potential is larger, but the potential-to risk ratio favors DJ.

So which would you choose? Whichever it is, now you have some quantitative comparisons to help your decision!