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Closingsа Openings

Whatever you do, do cautiously and look to the end.

aristotle - gesta romanorum

Of all the things I have learned about futures trading, the most important is that markets form patterns. The future direction of a market is often, but not always, discernible from the study of its patterns. And there are many patterns one can study - cyclical patterns, seasonal patterns, open interest and volume patterns, indicator patterns, price structure patterns, point-and-figure patterns, Japanese candlestick patterns, chart patterns, and more. Of these, many are worthless or specious. But there are a few worth knowing, worth studying, and worth trading.

Of all patterns, the most important and reliable I have found are based upon combinations and variations of the four important price variables each day: the opening price, the closing price, the high price, and the low price. By studying these, we can develop indicators that will be especially beneficial not only from the standpoint of predictability but, moreover, from the standpoint of profitability.

High/Low/Close Relationships

As an example of a price pattern that can occur within the course of a day, consider the relationship between the high price, the low price, and the closing price of the day. A market that ends the day close to its high of the day is one that is clearly in control of the buyers. Buyers have overpowered sellers, bidding prices higher, and as a result, the closing price of the day is near the high of the day.

A market that closes close to its low of the day is in control of the bears. The selling pressure of the bears has been enough to push prices lower and lower until they end the day near their low. In such a case, the bears are in control, overpowering the buying power of the bulls.

A market that consistently closes close to its high of the day, day after day, is a market that is clearly being controlled by the bulls, whereas a market that consistently closes close to its low of the day, day after day, is a market that is clearly bearish. The same relationship applies on an intraday basis using shorter time lengths than a day. As an example, consider the daily price chart of T-bond futures (Figure 11-1). This illustration shows how a strong bullish move develops subsequent to three daily price bars where the ending price (close) is near the high of the daily time frame. Figure 11-2 shows the opposite situation. Note how the daily crude oil futures chart shows a strong decline subsequent to three daily price bars where the ending price (close) is near the low of the daily time frame. Note also that for the duration of the decline, many of the daily price bars show a close near the low of the bar. This is typical of bear trends, while the reverse is typical of bull trends.

Figures 11-3 and 11-4 illustrate this relationship on intraday ( charts of different time lengths. As you can see, the same basic

relationships hold true on an intraday time frame.

Although the close-near-high or close-near-low relationship is a valuable one, there are others that may prove even more valuable. In fact, a number of such relationships may be combined in order to yield more reliable results.