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Critical Time of Day (CTOD)

Perhaps one of the most interesting and intriguing day-trading methods is what I call critical time of day (CTOD). This is a method I've been using since the late 1970s when I first developed it. It is both simple and easily applied, yet it is demanding inasmuch as it requires the trader to be present throughout the day, tracking prices every 5 minutes. This is why the method may not be suitable for all traders.

The CTOD method has remained virtually unchanged since it was developed. This is a strong testimonial to its efficacy. I caution you, however, to remember that CTOD is a method, it is not a system, although it is systematic and has the potential to be used as a system. CTOD is designed to spot intraday price moves based on the 5-minute closing price range during the first 2 hours of the trading day.

Basic CTOD Signals and Parameters

The basic methodology and operational procedures for using CTOD measures are as follows:

Вц Plot the 5-minute closing prices for the first 2 hours of trading regardВэless of market (see exceptions later on). By 5-minute closing prices, I mean the price at the end of every 5 minutes. The price used is the last price, not the intraday high or low price. When plotted according to the rules, the 5-minute closing price plot for the first 2 hours of trading will look like Figure 20-1. See also Figure 20-2 for ideal buy-and-sell signals the same day.

Remember this, it is important. Use the price at the end of each 5 minutes, not the high or low, but the last price each 5 minutes.

Вц Once the first 2 hours of 5-minute closing price data have been gathВэered, the highest price will be used as a buying breakout point, whereas the lowest price will be used as a selling breakout point.

Вц An upper breakout and buy signal will occur when prices have had a 5-minute "close" (i.e., plot) above the highest 5-minute closing plot established during the first 2 hours. You will then buy at the market using a 5-minute closing stop loss below the lowest closing 5-minute plot of the first 2 hours.

Вц A lower breakout and sell signal will occur when prices have had a 5-minute close (i.e., plot) below the lowest 5-minute closing plot estabВэlished during the first 2 hours. You will then sell at the market using a 5-minute closing stop loss above the highest closing 5-minute plot of the first 2 hours.

Вц You will use a trailing stop loss which consists of a 5-minute close below the lowest 5-minute close of each previous hour for longs and above the highest 5-minute close of the previous hour for short posiВэtions.

Вц As an alternative you can use a money management stop loss or a stop loss based on other indicators discussed in this book (e.g., movВэing averages or oscillators).

Вц You will exit positions either by the end of the day or by being stopped out either at a loss or at your trailing stop loss.

Figures 20-3 through 20-5 illustrate some examples of buy-and-sell sigВэnals using the 2-hour CTOD parameters.