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Day-of-Week Patterns with Timing

Yet another approach that I feel has great potential and applicability for the day trader is to use a day-of-week pattern with a timing technique. I have developed a specific method for doing so. I call it dual breakout or DBO. The DBO is a method that buys or sells only on given days of the week based on a breakout above or below the previous daily high or low and on the open/close relationship of the previous day. This method shows a high degree of accuracy; however, it requires you to hold your position until the first profitable opening. In S&P 500 futures this means holding until the next day's opening. See Figure 5-8 for an example of the DBO history on Mondays (or the first trading day of the week).

DBO Rules and Parameters

The DBO rules are simple:

ж Trade only on the indicated day or week (see historical records shown later in this chapter for day-of-week parameters).

ж Buy on a stop x ticks above the previous daily high if previous close was greater than previous open.

ж Sell short on a stop x ticks below the previous daily low if previous close was less than previous open.

ж Exit on a predetermined risk management stop loss.

ж Exit on the first profitable opening (FPO).

I stress that this method requires holding until the first profitable opening. Hence, it is not a day trade method, but it's as close to a day trade method as possible. As a point of information, it is often possible to exit these trades profitably in the Globex market after the official close of U.S. trading. Hence, this method can be considered slightly more than a day trade method and slightly less than an overnight method. Remember that, as a rule, I prefer not to trade on the Globex market, since liquidity is not acceptable at this time. This may change in the future.

Finally, please note that all of the historical tests in this book are subject to limits inherent in the Omega TradeStationЩ software which was used in my tests. One such limitation is the ability to differentiate whether a market touched its daily low or daily high first. This could be very important in triggering a stop loss or in failing to do so. While the software is designed to test for such cases, it is not perfect. Hence, the results in these tests may contain some minor inaccuracies due to the limitations of the software.

DBO on an Intraday Basis

The DBO method can be adapted and applied to intraday trading. My research in this area is still in process, but the initial results are promising. Rather than use a day of the week as the reference point or bar, a given hour or half hour of the day could be used (i.e., similar to the 30MBO method).

Summary

Historical and statistical research confirm the existence of date and day-of-week patterns. Some of these patterns have shown a high probability of repetition over many years. By combining the day-of-week and/or date seasonals with timing and risk management rules, valid systems can be developed based on these patterns. At times, holding a trade overnight or until the first profitable opening will yield better results than holding only until the end of the day session. Keep in mind that risk management of these trades is just as important as it is for all methods and systems discussed in this book.