by Ralph Russell, Nasdaq Real-time Signals Trader
Recently I wrote an article, Daytrading
in Quiet Markets, dealing with the reduced ranges we have
been experiencing. While the concepts in the above mentioned article are
basically correct, there is more to be said about this issue when
it comes to daytrading!
I have crabbed, complained, cried out and prayed that daily range would
increase. We made great money when we had increased ranges and have basically
had difficulty being profitable since we have had "reduced ranges."
I have said volatility was low and that is NOT CORRECT. Volatility
is actually very high in the Nasdaq mini 100 Index. Very High. It is almost
three times the volatility of the S&P and the DOW.
Every trader I speak with, every trader that visits with me, we all are
complaining that we have little to work with. We are wrong! Allow me to
present volatility in a new and different light for all of us to look
at and see if this information will help us.
See Volatility in a New Light
We will call our volatility "Relative Volatility" for the lack
of a better name at the moment. When we use the term "relative"
I assume we are talking of something that is related to something else.
This is correct.
When we began this mini NQ service at the end of the first 3 months in
mid December of 2000, (as pointed out in Daytrading
in Quiet Markets) we were averaging 166 points of range per day
on a 5-day basis and 157 points of range per day on a 60-day basis as
taken from the cash NDX index daily chart. I have complained that lately
we have been averaging 50 points or less per day and that the 60-day average
range was not a great deal better.
That is all hogwash! It is wrong and I apologize to you all for my ineptness
in examining this matter.
Let us Set the Record Straight.
The 60-day average closing price on December 19th, 2000 was 3066 so the
157 points of average daily range was 5.12% of average comparable (relative)
price. The average closing price was 2576 so the average 5-day range was
6.44% of average comparable (relative) price.
To turn these figures around and make them useful, if we know that our
average range for the day may be 6% of price and price is 2500 we can
expect 150 points of range.
- Once we have this understanding, we can then look to see where we
reach that point, above and below yesterday's close initially.
- Then check to see if we have the Pivot, the 1st or 2nd resistance
or support in that area, as it will probably be a significant number
for the day of trading coming up.
- We may even look to see where the "Math of the Markets"
has significant support or resistance levels that may correspond or
be "in the neighborhood," so to speak.
Once we get what might be an initial low or initial high in our intraday
market, we can apply the average range concept to it and come up with
a picture of the day's trading possibility.
If the average range is 40 points, a five wave structure may have waves
in it that only exceed the last wave by 8 points or so at best, (40/5).
So to try to get 10-12 or 14 points may be a waste of energy and a source
of frustration for the trader.
Some of our best results were from February of 2001 through August of
2001 although we were struggling toward the end of that period.
On August 31st, 2001 we were averaging 1672 price on a 60-day basis and
average range was 49 points or 2.93% of price. I would place stop orders
under pivots that may have been an 8-point wave and try to get the market
to move into a good profitable trade. It was not working out! There were
not going to be any 150 point days where a sell stop under or above a
pivot would net 10 - 15 - 20 or more points follow-through.
I have struggled since fall of 2001 until the present and have done everything
but tear my hair out. It has been frustrating for me as trade after trade
has gone in the money and then reversed, or even just sat for hours doing
Determining Probable Daily Range
When you put it together and realize that perhaps 3% of price is a
good range for the day you begin to see the light. Am I going to buy
that breakout to a new high? Not if we are close to our possible range
of the day. In fact I may sell it, fading the market, understanding that
a close stop loss order may work for the betterment of profits rather
than waiting to place a stop under a pivot.
Once you get a picture of the possibility of the day, in terms of range
as a percentage of prices, everything comes into place. If we have 3%
we have 3%. Will it be 3%? Probably not. It may be 4% or 2% but at least
we are not looking for a 150-point range when that might be 10%.
This past Tuesday, January 22nd, 2002 I had a very important number at
1496 level. It was a .382 retracement of 1739 and 1104, the high on December
5th, 2001 and the low of September 21st, 2001. I was convinced and adamant
about the market making my numbers. I tried several times as we broke
trying to make this number. When the day was done we had not made the
number and I was out for my largest loss in some time. I wondered why
at the time.
Now I can clearly see the problem. The first event was we opened at 1570.5
-- that was about the .618 level of the previous day's range. Then we
sold off finally making 1503 as a low late in the day, when I was convinced
we would make 1496. The problem was one of understanding the probability.
We already had a 4.41% range for the day of the previous day's closing
value and even in all my perfectionism of the "Math of the Markets"
could not get this market, which has been averaging less than 3% in range,
to stretch it out to just short of 5%. I already had about 150% of an
average day's range at this point in time.
I wasn't about to obtain my numbers. You can say it has to do with round
numbers such as 1500 and that may have some merit, but I am inclined to
believe it has more to do with how far we needed to stretch above the
standard deviation of range to obtain the number.
If I had the proper "picture of possibility" in my mind, I
could have very soon understood that if 1571 was the high we were headed
at least for 1530 or 1525 and made a very nice trade.
Currently, in mini Nasdaq 100, we are averaging about 3.16% of closing
price on a 5-day average. At a price of 1562 this means we would look
for a range of about 49 points on Monday as normal. The actual range may
be more, it may be less. If we add 49 points to 1562.5 Friday's close
(January 25th, 2002) we get 1611.5 and if we subtract it from Friday's
close we get 1513.5 and I would venture that this range possibility will
cover 99% of the possible outcome for Monday, short of a natural unexpected
Now I need a high or a low to further refine the range on Monday. Once
we have an initial High or Low on Monday we can add or subtract as appropriate
and have a view of the day's trading range before it occurs.
This knowledge will at some point on Monday allow us to consider selling
into the highs or buying into the lows with some degree of confidence
and with a short stop loss point. Without the consideration of range this
is a near impossibility to do from a mental standpoint. Picking Tops
and Picking Bottoms is said to lead to Picking Cotton and this may
not be true armed with the correct knowledge.
This knowledge will change our trading result outcome over time to an
even more successful venture.
For your general information the DOW Industrial basis the cash are currently
averaging about 1.22% and the S&P is averaging about 1.17% or about
1320 points per day and there is not a lot of sense wishing for 2500.
The S&P made 1120 points today (January 25th, 2002 ) and so achieved
85% of its possibility.
We all know that indicators like Stochastic and Relative Strength and
CCI etc. are really pretty worthless on short time frame intraday charts,
However, when we begin to consider range possibilities perhaps these tools
become more useful to us.
I know 1573 was the pivot in mini Nasdaq today (Jan. 25, 2002) and I
sold it twice as we rallied into it after we made the highs at 1576.5.
It seemed like a low risk trade as the stop was no more than 5 points
and the possibility was the 1556 level, which eventually was made. I may
not have handled these trades totally correctly but we took money from
each entry that was worthwhile considering the risk.
I will probably revisit this again as I work out more detail to the concept
of range consideration as a tool to guide our trading decisions.
© 2002 Ralph Russell