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6071.Calhoun K. - Tradeable price patterns (1989).pdf

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Stocks & Commodities V. 7:8 (241-242): Tradeable price patterns by Kent Calhoun
Tradeable price patterns
by Kent Calhoun
W
hat if you knew tomorrow had an 85% probability of closing higher. Do you think it w w would be
possible to find a way to make money? Such patterns do exist in the markets all the time, but go
unnoticed because traders do not know how to find them. You can estimate the probabilities associated
with any particular pattern of daily closes. Use a computer with your current data or manually tabulate
closing prices from, say, The Wall Street Journal or Investor's Daily .
First, Monday's close is always assigned a value of X whether it is up or down from Friday's close. For
each day that loses in the same direction as the Friday-to-Monday close, an X is used. For each close in
the opposite direction record an O. Thus, if Friday-to-Monday was up, Monday-to-Tuesday is up, and
Tuesday-to-Wednesday is down, your pattern will look like:
XXO
Next, all the possible patterns should be arranged on a grid like Figure 1, which is a summary of weekly
cattle patterns for the period January 1977 to January 1984. To read the chart, start on the left with the
first XO combination. In this study, XO (a Monday up and Tuesday down) occurred 55% of the time.
Subsequently, an XO was followed by an up (XOX) 50% of the time and a down (XOO) 50%. Thus the
combination XO had an exactly even chance of going up or down on Wednesday—not a tradeable edge.
More useful is the knowledge that an XX was followed by a down day 57% of the time. However, even
Article Text
Copyright (c) Technical Analysis Inc.
1
Stocks & Commodities V. 7:8 (241-242): Tradeable price patterns by Kent Calhoun
57% is probably not a tradeable edge. The best available edge is XOOO and XXXO, both of which are
followed by a decline on Friday 61% of the time.
To replicate the study on your tradable merely tabulate the number of closes by each appropriate pattern.
Then compute the percentages as proportions of the total number of trades from the previous fork in the
table.
Sometimes, these patterns can be quite striking. A nine-year soybean pattern showed that if Monday was
up (X), Tuesday was up (X), and Wednesday was down (O), then Thursday was up 72% of the time. One
CME meat contract that was up Monday, Tuesday, Wednesday and down Thursday (XXXO) would close
higher on Friday 85% of the time. A bull market in meats revealed if Monday was down from Friday,
Tuesday would be up 75 % of the time and Wednesday would be up 83% of the time. In other words, a
Tuesday intraday correction in a bull market was a buying opportunity for a higher close.
A derivative of the daily patterns study is the sixth-day-down probability. A study conducted from 1977
to 1983 asked whether the day after any given five-day pattern would be down or not. It allowed any day
to close negatively, patterns could begin with a minus sign (an "O" in the previous study) instead of a
plus sign. As in the previous study, many patterns were unusable, but some hold promise (Figure 2).
Given the computer power available to today's traders, studying patterns shouldn't be difficult.
Surprisingly, this simple methodology often shows tradeable results.
Kent Calhoun is a commodity trading consultant now writing a commodity trading course and a book,
Eight $10,000 Trading Systems,1121 N. Main, # 19, Cedar City UT 84720.
References
Copyright (c) Technical Analysis Inc.
2
Stocks & Commodities V. 7:8 (241-242): Tradeable price patterns by Kent Calhoun
References
Kaufman, Perry [1987], "The New Commodity Trading Systems and Methods," John Wiley & Sons:
New York.
Swing Trader software, CTCR Products, 1731 Howell Ave., Suite 149, Sacramento. CA 95825, (916)
677-7562.
FIGURE 1:The New Commodity Trading Systems and Methods, Perry Kaufman, copyright © l987, John
Wiley & Sons Inc., reprinted by permission of John Wiley & Sons Inc.
Figures
Copyright (c) Technical Analysis Inc.
3
Stocks & Commodities V. 7:8 (241-242): Tradeable price patterns by Kent Calhoun
FIGURE 2:
Figures
Copyright (c) Technical Analysis Inc.
4
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