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The Consecutive Closes System

Yet another method of finding profitable day trades is what I call the consecutive closes system. The approach is simple. As the name indicates, this method generates buy and sell signals based on the number of conВэsecutive higher or lower closes. Although markets post true closing prices at the end of each trading session, this does not, in fact, occur on an intraday basis. We simply refer to the last price of each 5-minute time segment as the 5-minute closing price. In actuality, it is not a closing price but merely the price at the end of each 5 minutes. A 30-minute closing price would be the closing price at the end of each 30-minute time segВэment. While this is truly a simple concept, it never ceases to amaze me how many traders who are otherwise knowledgeable and intelligent fail to grasp the idea. Please make sure that you do before reading on.

Definitions and Signals

The consecutive closes system (CC) is based on a simple but profitable and sensible concept: Once a trend has established itself, it is best to go with that trend until and unless it changes. The problem is, as always, twofold. First, you need to identify the trend, and, second, you need to know when to get aboard the trend. The CC system achieves these goals as follows:

1. A buy signal and an up trend are defined when the market has made a given number of up closes in a row. Therefore, if we are using a sigВэnal which consists of five consecutive up closes in a row, we are using a 5CCU buy signal (5 consecutive closes up).

2. A sell signal and a down trend are defined when the market has made given number of down closes in a row. Therefore, if we are using a signal which consists of five consecutive down closes in a row, we are using a 5CCD signal (5 consecutive closes down).

That's all there is to the basic signal and trend identification. Figures 18-1 and 18-2 show each of the signals in ideal form, and Figures 18-3 and 18-4 show them in real time on a 5-minute bar chart. As you can see, a CCU signal triggers a buy, and a CCD signal triggers a sell. Figures 18-5 and 18-6 illustrate the CCU and CCD signals on a 10-minute chart.

The implementation of CCU and CCD signals is also a simple matter. If a 5 CCU buy signal is being used, then you buy the fifth higher consecuВэtive close (see figures). You hold the position with a predetermined stop loss or you exit the long and reverse to short when you get a CCD sell signal. In practice, the number of consecutive closes which generates a buy signal will not necessarily be the same as the number of CCs which generate a sell signal. You may use three approaches in implementing the CC system.

Вц Close out positions at a specific target. The problem with this approach is that you will limit your profits. When a runaway move occurs, you won't be on board. The successful trader must ride profits as long as possible.

Close out and reverse positions when a reversing signal has occurred or at the end of the day.

Use a trailing stop loss. You will find that using a trailing stop loss to exit positions and go flat may serve you better than using a strictly reversing system.

Summary and Conclusions

The CC method is a viable and effective technique for short-term and day trading. This technique appears to perform better on a short-term basis, carrying positions for several days, than it does strictly on a day-trade basis. Remember, however, that this system will work better at some times than others, that it will work better in more volatile markets, and that you are better off using a trailing stop loss as opposed to waitВэing for a reversal signal.