In the June 1985 issue
of Technical Analysis of Stocks & Commodities magazine, I presented
some possible strategies using ARIMA (AutoRegressive Integrated Moving
Averages) to trade the September Standard & Poor's (S&P) 500 Futures.
The Stochastics Oscillator was discussed in the May and September 1984 issues
of Technical Analysis of Stocks and Commodities. Now, I will combine
ARIMA from daily data, stochastics, and use half hourly Standard & Poor's
(S&P) 500 index futures prices. The half-hourly price data and the
stochastics are obtained from Intra-day Analyst, software specifically designed
for intra-day price analysis.
—ARIMA Sets the Day's Range
The ARIMA forecasted
highs, lows, and 50% confidence levels were calculated from a model developed
for the S&P 500 September 1984 futures with EASI/ARIMA—The 2%, Solution . I
refer to these forecast levels as potential action points. Both the regular and
the slow stochastics are presented for comparison in Figure 1 along with the price action. Figure 2 lists Daily ARIMA
forecasted values.
Recall that the 50's,
confidence level provides the upper and lower boundary values peculiarly
referred to as HIHI, LOHI, HILO, and LOLO. Figure 3 depicts the forecasted values
(solid line) and the 50%, boundaries (dotted line) superimposed on the price
chart without any studies. Figure 5 displays price action, forecast prices, and the slow
stochastic. Figure
4 illustrates
the regular stochastic.
You may want to refresh
your stochastic knowledge by referring to the articles by Lane and Schirding
(See Bibliography).I have found that the signals are not nearly as clear in
real time as they are in the text book examples.
Basically, you want to
locate stochastic buy or sell signals at or near the forecasted levels. Once
positions are entered, ARIMA levels will be used for stop loss protection. In
actual trading, you might elect to take signals only if the actual crossover
occurs (sometimes the crossover occurs after a substantial price move has
already taken place) or you may choose to be moreВ anticipatory in entry signals. You, the trader, must make the
final decision on exactly how you will use these tools. You also have the
choice whether to liquidate a trade on the close or carry it over to the next
day in the absence of a reversal signal. t
Before I describe trading signals,
here are some observations for using ARIMA forecasts.
1) Prices exceed forecasts in the
direction of the trend in force.
2) Openings which exceed the ARHI or
ARLO indicate additional strength or weakness.
3) Prices exceeding the HIHI or LOLO
indicate exceptional strength or weakness for that day.
4) Stop Loss protection is the LOLO
in the case of a long, and the HIHI in the case of a short position.
I consider theses to be the absolute
fail safe points.
Stochastic & RSI
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