CISCO Futures
1-303-306-1521 1-800 800 7227 Fax 1-303-306-1598
Internet http//www.cisco-futures.com
Email dljones@cisco-futures.com
December 29, 1999
Copyright Donald L. Jones, CISCO Futures 1999
Keywords:
Basic Strategy, Paper Trading, Use of Reference Points, Tables (90 day history),
Trade Selection,
The TCP Strategy and Results daily report is meant to train beginning users of the
TCP/Visual Graphic data to PAPER trade using the TCP/Visual Graphic data
and the BASIC trading strategy. (Basic Strategy uses two reference points, Bracket Limit
and Octant Risk. In a real trade you would use a number of additional reference points
to help you understand market condition--e.g. volume, volatility, past trading as seen
on the Overlay, value area from the Meta-Profile, etc.)
A primative model like 'Basic Strategy' has several uses. First it is simple and
easy to understand. It is helpful in learning the basics of auction market
trading. Since it is the simplest and requires no judgment it is a ground level
measure of trading and can be contrasted with a more sophisticated approach
as embodied in the Advice Engine Select Table. You do not have to be a
subscriber to Advice Engine to examine a history of Select Tables:
Homepage
Advice Engine
Select Table History Data
For instance, Part 1 of the Advice Engine Report might show 40 balances with
Octant risks ranging from $50 to $500. The Select Table might have only 8
candidates. Eliminated from consideration are those considered to offer too
little opportunity (a CISCO proprietary algorithm is used), one element is
obviously those with very small risk (low risk and low potential are the
rule). So the Select futures may be only 20 percent of the total. However,
'Basic Strategy' is willing to trade them all. So, a second important use
for 'Basic Strategy' is as a measure of primitive model against the more
sophisticated model. The Value trader has numerous pieces of information
(reference points) to help develop a model far better than 'Basic Strategy',
just as illustrated by Select Table.
Covering the last two days, the report gives the entry and exit prices for the BASIC
trading strategy for markets that have bracketing 5 and/or 10 day overlays.
It also gives the results of the BASIC trading strategy, when the tick
data becomes available (i.e. if tick show a stop-out).
It lists other TCP reference points, also relating them to their
averages and deviations - obtained from the free TCP average tables.
Now, the beginning user of the TCP/Visual Graphic data can
check his independant determination of the entry and exit points based
on the BASIC trading strategy, and the results of the trade.
Once confident that he understands the BASIC strategy and how to PAPER
trade it, the beginner can refine
the BASIC strategy using the additional reference points contained in the
printout i.e. volatility, bracket size, trade facilitation factor,
commercial capping, LDB volumes, and daily ranges as well as other
reference points not in the printout but contained in the
TCP text data/Visual Graphic data.
Note: The Strategy and Results report has been replaced by the Advice
Engine.
Advice Engine Background
This methodology is NOT MEANT AS A TRADING SYSTEM. It is intended as
a LEARNING TOOL. Remember, a trader has to also determine if he can
tolerate the potential risk of the trade. This is a function of cash
in the bank, experience of the trader, number of different commodities
traded and willingness to live/trade responsibly at high risk; and thus
varies greatly from individual to individual. For a full discussion of
trading model development go to:
Trading Model Development.
The three BASIC strategy reference points are:
-- the upper and lower edges (limits) of the bracket
-- the upper and lower octants of the bracket
-- the center of the bracket (center of value)
Some extra reference points are:
a) Delivery: leading delivery or otherwise, and if it is not,
which one is? We use the leading delivery table.
Click for Free Leading Delivery Table
Click for Background on Free Leading Delivery Table
b) From the TCP/Visual Graphic Report
-- bracket range
-- volatility (Cv)
-- daily range
-- trade facilitation factor (Tff)
-- total LDB commodity volume (Tv) (if available)
-- commercial/public LDB commodity volume (Pv) (if available)
-- commercial capping (CME & CBOT)
These reference points are quoted with their current absolute size along with
their relative size based on their current value relative to the 90
day averages/deviations quoted in their free TCP average tables.
Click for Free Bracket Range (in dollars) Averages Table
Click for Background on Free Bracket Range Averages Table
Click for Free Volatility (in price ticks -Cv) Averages Table
Click for Free Volatility (as a price range) Averages Table
Click for Free Volatility (in dollars) Averages Table
Click for Background on Free Volatility Averages Table
Click for Free Daily Range (as a price range) Averages Table
Click for Free Daily Range (in dollars) Averages Table
Click for Background on Free Daily Range Averages Table
Click for Free Trade Facilitation Factor (Tff) Averages Table
Click for Background on
Free Trade Facilitation Factor (Tff) Averages Table
Click for Free Total LDB Volume Averages Table
Click for Free Commercial LDB Volume Averages Table
Click for Free Public LDB Volume Averages Table
Click for Background on Free LDB Volume Averages Table
c) The location of the current close relative to the bracket limits/center.
d) The location of the current commercial activity (if any) relative to bracket
limits/center.
After choosing an Overlay that is bracketing today, we identify:
-- the upper and lower edges (limits) of the bracket (breakouts)
-- the upper and lower octants of the bracket (protective stops)
-- the center of the bracket
These are the three Overlay reference points.
The BASIC strategy for tomorrow is:
-- Go Long/Short if price moves above(below) the upper(lower) bracket limit.
Here we bet that the continuation of price moving outside the bracket
(a breakout) is an alert to the start of a trend. Sometimes however the
bet is wrong and the breakout is false.
-- If price moves below(above) the upper(lower) bracket octant:
-- exit the breakout trade
-- An option is to enter a reversed, responsive trade:
i.e. long becomes short (short becomes long)
Here we bet that the continuation of price toward the bracket center
is an alert to balanced market behavior i.e. price spends most of
the time near the center and a rotation of price from the center
will result in a prompt return to the center.
-- exit the reversed,responsive trade:
--- at the center
--- if prices moves above(below) the upper(lower) octant
-- exit all open trades at market close.
Holding overnight requires a greater understanding of the markets.
The Homestudy Course Lessons 11-12 can further educate you on this.
We do not want to put our protective stop in the noise. Thus we
seek an Overlay whose bracket octant is at least as large as the volatility
so that the breakout entry and stop (and responsive entry) are outside the
data noise. (See also: use of volatility below)
Also we want an Overlay whose daily range is at least half of the bracket
range so that the reversed, responsive trade has a chance of getting a
reasonable way back to the center of the bracket in one day (since we
exit no matter what at the close)
We also do not want the daily range to be so large that it is
near/greater than the size of the bracket range, since this would have us
trading at high volatility (high risk, our stop would be in the noise).
Also we want the bracket range to be large enough to be of financial
interest. A larger bracket implies greater risk, as well as greater
potential for profit.
-- If the bracket octant is used as the stop stop in a breakout trade,
the maximum $ risk is the $ value of the bracket octant.
-- If the bracket octant is the entry price for responsive trades, the
octant-centre $ value is the maximum $ profit that can be made.
An unusually small bracket or daily range is an alert to a
market that is shutting down. An unusually high current bracket or daily
range usually indicates a volatile market; one with much public
participation.
The measure of size is the average +/- one or two standard deviations
gotten from the bracket/daily range tables giving 90 day
averages/deviations.
Click for Free Bracket Range (in dollars) Averages Table
Click for Background on Free Bracket Range Averages Table
Click for Free Volatility (in price ticks -Cv) Averages Table
Click for Free Volatility (as a price range) Averages Table
Click for Free Volatility (in dollars) Averages Table
Click for Background on Free Volatility Averages Table
Click for Free Daily Range (as a price range) Averages Table
Click for Free Daily Range (in dollars) Averages Table
Click for Background on Free Daily Range Averages Table
The leading delivery table lets you determine the fraction of volume
a delivery is currently trading and if it is the leading delivery.
However, some commodities such as the CME eurodollars and the CBOT grains
(during spring/summer) have the volume almost equally spread over several
nearby deliveries. In that case, one needs other information to select
the proper delivery, e.g. commercial participation.
Click for Free Leading Delivery Table
Click for Background on Free Leading Delivery Table
Second we want to know how big the current day's volatility is relative
to the current day's bracket octant; and if the current bracket octant is
big/small/average compared with the 90 day average. If the data noise is
too high we cannot resolve the breakout/stop levels.
We use price range volatility here and not price tick volatility (Cv)
merely for convenience so that we can compare the octant range with the
volatility range more precisely; since to convert price ticks to price
ranges requires knowing the average tick increment and this varies based
on trading.
In the TCP text and Visual Graphic data we only provide the
current price tick volatility (Cv). The tables have both the tick and the
range volatility (range volatility becomes significant of ticks are larger
than unity).
The measure of size is the average +/- one or two standard deviations
gotten from the range volatility tables giving 90 day averages/deviations.
The simplest decision is to change to a 10 day bracket(if it exists) from
5 day bracket if the 10 day octant is greater than the volatility, and
the 5 day octant is not. Then use the 10 day reference points instead of the
5 day. Of course the greater bracket range of the 10 day would mean added
absolute risk/potential reward in a responsive (reversing) trade.
One might instead modify the breakout entry price and breakout stop
based on volatility as follows (especially if there is no 10 day bracket):
The modified bracket entry might be:
--- a bracket limit plus/minus some multiple of the current volatility.
The modified breakout stop might be:
--- the greater of the bracket octant range and the volatility.
The choice comes with experience.
Also to be considered is if the bracket range and volatility are high/low
relative to the 90 day averages. The current octant might be larger
than the current volatility only because the current octant is average,
and the current volatility is low relative to the 90 day average. Or
it could be that the current octant is high and the current volatility is
average relative to the 90 day average. Since the volatility contributes
to the building of the bracket, the averageness/or-not of the octant and the
volatility is closeley coupled, and any difference is usually local.
Some find it instructive to look at the average octant value relative to
the average volatility value for average strategies.
See also: "Choice of an Overlay" above.
Click for Free Volatility (in price ticks -Cv) Averages Table
Click for Free Volatility (as a price range) Averages Table
Click for Free Volatility (in dollars) Averages Table
Click for Background on Free Volatility Averages Table
The measure of size is the average +/- one or two standard deviations
gotten from the Tf tables giving 90 day averages/deviations.
Click for Free Trade Facilitation Factor (Tff) Averages Table
Click for Background on Free Trade Facilitation Factor (Tff) Averages Table
A current day's close near the edge of the bracket could be an alert to
a breakout tomorrow. It could have come about because of:
-- movement of price from center of bracket
-- breakout testing with price move back into the bracket
-- current daily range is about the size of the current bracket range
(situation to avoid)
If the current day's close is in the center of the day's high-low range
and there is commercial action at the high and/or low, then we
can reasonably say there is capping there.
The bracket center gives value based on the last 5,10,15,20 days BUT the
commercial analysis can modify that.
The location of capping action (i.e. the current day's high or low) relative
to the bracket center/edges can show shifts in value.
If the latest day's high is near the bracket upper limit and there is
capping there several periods prior to the close, then a breakout from
the upper limit tomorrow would probably be questionable. Similarly for
the lower limit and the low for the day.
If the latest day's high is near the center of the bracket and there is
capping there, then value may have shifted below the center of the bracket.
Similarly for the low near the center of the bracket and capping there
suggesting value has shifted above the center of the bracket.
Homestudy Lessons 2,7-9 cover this topic.
Examine Homestudy Course Lessons 9,11,12 to see how to use this information.
We use the total commodity volume. This is a sum over all current deliveries.
This is an easier way to compute the 90 day averages, since most deliveries
trade activeley for only 20-60 days. We provide tables for JUST the
total LDB commodity volumes. The TCP text and Visual Graphics data provides
ONLY the futures(a particular delivery) total volume.
The measure of size is the average +/- one or two standard deviations
gotten from the total LDB commodity volume tables giving 90 days
averages/deviations.
Click for Free Total LDB Volume Averages Table
Click for Background on Free LDB Volume Averages Table
Examine the Homestudy Course Lessons 9,11,12 to see how to use this information.
We use the total commodity volume. This is a sum over all current deliveries.
This is an easier way to compute the 90 day averages since most deliveries
trade activeley for only 20-60 days. We provide tables for JUST the
commercial LDB commodity volumes. The TCP text and Visual Graphics data
provides ONLY the futures(a particular delivery) commercial volume.
The measure of size is the average +/- one or two standard deviations
gotten from the commercial LDB commodity volume tables giving 90 day
averages/deviations.
Click for Free Commercial LDB Volume Averages Table
Click for Background on Free LDB Volume Averages Table
Examine the Homestudy Course Lessons 9,11,12 to see how to use this information.
We use the total commodity volume. This is a sum over all current deliveries.
This is an easier way to compute the 90 day averages since most deliveries
trade activeley for only 20-60 days. We provide tables for JUST the
public LDB commodity volumes. The TCP text and Visual Graphics data
provides ONLY the futures(a particular delivery) public volume.
The measure of size is the average +/- one or two standard deviations
gotten from the public LDB commodity volume tables giving 90 day
averages/deviations.
Paper Trading
Trading History Example
Click for Free Public LDB Volume Averages Table
Click for Background on Free LDB Volume Averages Table