Td Fib Range, Td Exit One

TD FIB RANGE, TD EXIT ONE

The first four indicators, TD Fib Range, TD Exit One, TD REBO Reverse, and TD Camouflage, are of relatively recent vintage and are designed to capitalize on intraday price exhaustion. The fifth indicator, TD Range Projection, is intended to provide a trader with a means of effectively predicting the following trading day’s price range. In the context of day trading options, these five indicators work well in establishing levels of impending price reversals. Because they are contratrend in nature and by design, they enable a trader to anticipate potential levels of support and resistance, in the option as well as the underlying security.

TD FIB RANGE

As we indicated earlier, it’s easy for a trader psychologically to jump upon an existing trend or participate with the majority of traders, but it’s much more difficult to operate against the prevailing trend by anticipating likely trend reversal levels. To overcome this apprehension and accomplish this goal we researched what market characteristics preceded or coincided with possible market turning points. What we came up with was an indicator called TD Fib Range. TD Fib Range gets its name from utilizing a ratio that is Fibonacci-derived. Fibonacci numbers are a number series where each successive number in the series, when divided by its prior number in the series, yields 1.618, and each number in the series, when divided by the following number in the series, yields 0.618. TD Fib Range uses this Fibonacci ratio—1.618—to calculate expected price movement termination levels. In our research, we discovered that oftentimes when short-term market tops and bottoms occur, daily price range movements added to or subtracted from the previous trading day’s close either exceeded (1) 1.618 times the previous trading day’s true price range or (2) 1.618 times an average of the previous three trading days’ true price range.  When price reached these TD Fib levels, the market had a tendency to exhaust itself. When the market trades outside of these points of exhaustion, an ideal low-risk call-buying opportunity in the case of a price decline below the lower TD Fib level, or an ideal low-risk put-buying opportunity in the case of a price advance above the upper TD Fib level is presented at the close of the price bar or the following price bar’s open. Oftentimes, the market records these TD Fib Range moves in excess of 1.618 times the previous price bar’s true range or 1.618 times the average of the previous three trading days’ true price ranges added to or subtracted from the previous trading day’s close coincident with a news announcement. News releases have the effect of causing a noticeable increase in volume, both in a security and its related option contract. Although this indicator is intended to be applied to the underlying security, the implications of a potentially exhaustive price move should be felt similarly by any related options. Consequently, we suggest monitoring the underlying security and once an indication of price exhaustion exists, then apply the conclusions to the option, as well as the underlying security. Furthermore, we strongly recommend TD Fib Range be used in conjunction with option-related trend exhaustion indicators, such as TD % F and intraday TD Dollar-Weighted Put-Call and Open Interest statistical information, to confirm short-term market tops and bottoms.

TD Fib Range can be perfected by including a series of qualifiers which will insure that the market is sufficiently short-term oversold downside or short-term overbought upside to exhaust a price move intraday or on the close. For example, one might require the current price bar’s high to exceed upside 1.618 times the previous price bar’s true range added to the previous close coincident with that same price bar’s high exceeding both true highs three and four price bars earlier; or the current price bar’s low to exceed downside 1.618 times the previous price bar’s true range subtracted from the previous close coincident with that same price bar’s low exceeding both true lows three and four price bars earlier. This rule would provide an indication that the market may be sufficiently overbought or oversold intraday to reverse prices at least for a short period of time. We experimented with a series of preconditions and arrived at the following additional qualifier. If the market exceeds upside 1.618 times the previous trading day’s true price range, or 1.618 times the previous three trading days’ average true price range, added to the prior trading day’s close, then a low-risk sell entry (put purchase) occurs at the close of the current day. A secondary qualifier requires that the close of the current day must be greater than all prior four closes. Conversely, if the market exceeds down-side 1.618 times the previous trading day’s true price range, or the previous three trading days’ average true price range, subtracted from the prior trading day’s close, then a low-risk buy entry (call purchase) occurs at the close of the current day. Again, a secondary qualifier requires that the close of the current day must be less than all prior four closes. If any of the requirements are not fulfilled, a trader could expect the market to continue its move in the direction of the breakout and no action is to be taken. Although we don’t necessarily recommend its application, one could use the failure of the high upside exceeding both the highs three and four price bars earlier for a low-risk sell (put purchase), or the failure of the low downside exceeding both the lows three and four price bars earlier for a low-risk buy (call purchase) as a trend confirmation indication. In any case, other qualifiers can be introduced and other daily range multipliers besides 1.618 can be substituted. It is important for an option trader, when applying this indicator to the underlying security, to confirm the results for the option as well by applying the option rules discussed earlier, as well as TD % F and TD Dollar-Weighted Put-Call and Open Interest.

TD Fib Range requires that a day trader enter at the close of trading or at the succeeding trading day’s opening provided that the open is in the direction of the anticipated trade. Obviously, entry at the succeeding trading day’s opening is more reasonable if one is an option day trader. The only requirement we recommend be introduced to perfect this day trade is that the open occur in the direction of the trade; that is, if a call option is to be purchased, then the open must be above the previous trading day’s close, and if a put option is to be purchased, then the open must be below the previous trading day’s close. This requirement is similar to the qualifier included with indicator TD REBO Reverse. Also, a day trader can elevate the TD Fib Range factor to 2.00 (double the previous day’s true price range) instead of 1.618 to ensure that any entry that occurs on the TD Fib Range breakout bar is not premature.

Figure 9.1 (Coffee March 1999) identifies those occurrences in which TD Fib Range fulfills the preceding requirements. Specifically, to identify a potential low-risk sell opportunity (put purchase), 161.8 percent is multiplied by the previous trading day’s true price range and then added to that day’s close. The TD Fib Range

Figure 9.1. March Coffee 1999 displays four times in which TD REBO Reverse identified possible short-term price exhaustion levels.

level is plotted on the chart but the low-risk selling opportunity (put purchase) exists not at that specific price level marked on the chart with a hash mark, but rather at that day’s close. Note that this example does not include an average of the previous three trading days’ true ranges as an alternative value. Conversely, to identify a low-risk buy opportunity (call purchase), 161.8 percent is multiplied by the previous trading day’s true price range and then subtracted from that day’s close. The TD Fib Range level is plotted on the chart but the low-risk buying opportunity (call purchase) exists not at that specific price level marked on the chart with a hash mark, but rather at that day’s close. Note that this example does not include an average of the previous three trading days’ true ranges as an alternative value.

Figure 9.2 (Dollar-Mark Cash) shows seven instances over an 11-week period in which TD Fib Range spoke. In every instance but one, the market responded the next trading day by following through in the direction of the low-risk indications and the lone instance in which it didn’t respond the next trading day, it did soon afterward. Once again the placement of the rectangles on the chart is merely for purposes of illustration since the low-risk entry levels are defined at the close that trading day.

The settings for TD Fib Range are provided only for purposes of example. They can be changed or substituted with other qualifiers. The measurements are all applied to the underlying securities and the conclusions drawn are in turn applied to the related options. By applying the settings we proposed initially, the low-risk entries are limited to the close of the TD Fib Range breakout day or the following day’s open if it opens in the direction of the breakout. Additionally, by expanding the factor to 2.00 from 1.618, the opportunity exists for intraday entry and day trading. When used independently or preferably in conjunction with other indicators described in this book, timing of option purchases, whether they be calls or puts, can be improved.

TD EXIT ONE

TD Exit One is an indicator that we originally developed to exit outstanding market positions. Today, however, we have found that this indicator is also effective in initiating market positions in options and their underlying securities. Very simply, there are three requirements for a TD Exit One low-risk buy (call purchase):

1. The market must record three consecutive down close price bars, where the close one price bar ago is less than the close two price bars ago, the close two price bars ago is less than the close three price bars ago, and the close three price bars ago is less than the close four price bars ago.
2. The current price bar’s open must be greater than the close one price bar ago and the current price bar’s low must trade less than the close one price bar ago.
3. The price range one price bar ago—chart high to chart low—must be greater than the true price range two price bars ago—true high to true low.

Figure 9.2. The Cash German Mark recorded four instances in which price exceeded the TD REBO Reverse momentum thresholds. In each case, the following trading day’s opening provided an opportunity for a day trader to assume a position and enjoy the inception of a trend reversal.

A low-risk buy (call-buying) entry occurs one tick less than the close one price bar ago; however, in some instances, the low-risk buy (call-buying) entry can also appear at the low one price bar ago. Consequently, a dual-entry possibility can exist depending upon one factor, referred to as TD Differential (downside). The distinction between the two entries arises from the comparison of the price difference between the low and the close of the previous price bar versus the low and the close two price bars ago. If the difference between the close one price bar ago and the low one price bar ago is greater than the difference between the close two price bars ago and the low two price bars ago, then the low-risk buy (call-buying) level is one tick below the previous price bar’s close; and if the difference between the close one price bar ago and the low one price bar ago is less than- the difference between the close two price bars ago and the low two price bars ago, then the low- risk buy (call-buying) level is one tick below the previous price bar’s low. Now there will be instances when the market will fail to decline below either reference price level—the close one price bar ago or the low one price bar ago—and to avoid missing these trading opportunities, a trader should buy a partial position at the current price bar’s open. At that time, it may be prudent to purchase one-third of the intended call option position at the opening and the balance once price declines below either reference level.

Conversely, there are three requirements for a TD Exit One low-risk sell (put purchase):

1. The market must record three consecutive up close price bars, where the close one price bar ago is greater than close two price bars ago, the close two price bars ago is greater than the close three price bars ago, and the close three price bars ago is greater than the close four price bars ago.
2. The current price bar’s open must be less than the close one price bar ago and current price bar’s high must trade greater than the close one ago.
3. The price range one price bar ago—chart high to chart low—must be greater than the true price range two price bars ago—true high to true low.

A low-risk sell (put-buying) entry exists one tick greater than the close one price bar ago; however, in some instances, the low-risk sell (put-buying) entry can also appear at the high one price bar ago. Consequently, a dual-entry possibility can exist depending upon one factor, referred to as TD Differential (upside). The distinction between the two entries arises from the comparison of the price difference between the high and the close of the previous price bar versus the high and the close two price bars earlier. If the difference between the high one price bar ago and the close one price bar ago is greater than the difference between the high two price bars ago and the close two price bars ago, then the low-risk sell (put-buying) level is one tick above the previous price bar’s close; and if the difference between the high one price bar ago and the close one price bar ago is less than the difference between the high and the close two price bars ago versus the difference between the high and the close two price bars ago, then the low-risk sell (put-buying) level is one tick above the previous price bar’s high. Now there will be instances when the market will fail to advance above either reference price level—the close one price bar ago or the high one price bar ago—and to avoid missing these trading opportunities, a trader should sell (purchase a put) at the current price bar’s open. At that time, it may be prudent to purchase one-third of the intended put option position at the opening and the balance once price advances above either reference level.

Figure 9.3 (S&P 500 December 1998) displays various instances in which a series of down or up closes are punctuated with a price exhaustion move which develops into a price reversal. On the chart, price hash marks are used to indicate the low-risk buying (call-buying) opportunities. There are four instances over a relatively short period in which TD Exit One successfully identified trend exhaustion and price reversal levels. In each of these instances, the most recent of the series of down closes or up closes is exceeded intraday the next trading day, enabling a trader to enter the market. As you can see, only the second example—September 1—had its low-risk call-buying level below the prior trading day’s low due to the failure of TD Differential. The other three had their low-risk call-buying entry levels a tick below their respective trading day’s closes because of TD Differential.

Figure 9.4 applies TD Exit One to a daily Intel chart. TD Exit One is designed to identify potential price exhaustion zones. This chart displays two examples of this indicator for INTO. Once three consecutive up closes or down closes are recorded, the market is vulnerable to a price reversal. If three successively lower closes are recorded, the next price bar’s opening price must be above the most recent (previous price bar’s) close and that same price bar’s low must be less than or equal to that close. Conversely, at a potential price exhaustion peak once three successively higher closes are recorded, the next price bar’s opening price must be below the most recent (previous price bar’s) close and that same price bar’s high must be greater than or equal to that close. The first instance was a low-risk sell (put-buying) indication and the market recorded a sharp one day decline. In the second instance, the market recorded a low-risk buy (call-buying) indication but did not respond until the next trading day. The next day the market responded with a gap opening upside to establish market equilibrium which was suppressed the previous trading day. The latter example illustrates that even though a day trader may have suffered a loss, had the trader held the position overnight, it would have proved profitable. An indication that a day trade may be unprofitable exists whenever the trade occurs late in the trading day since time is an important factor. Our recommendation is that if day traders are determined to trade within the last two hours of trading, they should be prepared to extend their holding periods until the next trading day.

Figure 9.3. This is a chart of the December 1998 S&P 500. TD Exit One must be preceded by three consecutive down closes or three consecutive up closes. In this chart, all examples are low-risk buy possibilities.

Figure 9.4. This chart of Intel illustrates two examples of TD Exit One. The first is a day trading opportunity for a low-risk selling opportunity and the second presents a low-risk buying opportunity.

The December British Pound 1998 futures contract (Fig. 9.5) identifies an example of a TD Exit One low-risk buy. Three consecutive down closes were recorded and the open of the next trading day was above the prior day’s close. Once the low traded less than or equal to the prior trading day’s close, a low-risk call buying opportunity occurred. Again, this indicator works well when applied to a daily chart and can be used to predict continued movement of the TD Exit indication. For that reason, we suggest one consider holding one’s position longer than the close if other indicators confirm. Other qualifiers can be introduced to perfect trades. For example, the trading range of the most recent of the three consecutive down or up closes must be greater than the prior trading day’s price range.