Low-To-Close Euro Edge

I was recently looking at a daily chart of the Euro when I noticed something that has always been there but it never really caught my attention. Below is a chart of the Euro future contract. The days are not important. Look at each candle. Notice anything?

Nearly all the days have pronounced tails. It’s also true they all have wicks, but for the sake of simplicity let’s just look at the tail. The tail of a daily candle is the “wick” below the candle. Suddenly one thing stood out at me: the daily close if often well above its intraday low. This got me thinking if I could buy near the daily low I might just have an edge to capture those ticks. And by the look at some of those tails, there is a lot of dollars just sitting there. But what I’m talking about is bottom-picking. How often are we told not to pick a bottom or picking a bottom is a fool’s game? Such conventional wisdom may be true. I don’t know since I’ve not seen or performed such a study. Once again I remind myself, in the trading world what passes for conventional wisdom is often nothing more than a myth.

The obvious challenge is to pick the intraday bottom. But, how to do that? It’s a good question. No one knows when the bottom will be put in.  But that’s not what I want to talk about in this article. Thinking about how to create a system at this point may be jumping a little ahead. What I have described with our Low-To-Close (LTC) observation is a trading concept that we know little about. The next step is to explore this concept in more detail and see what we can find. By doing so we may find it’s not worth looking into. Or we may find a seed to a profitable market edge.

The LTC observation is the price difference between the closing price and the low of a single daily candle. The first thing I want to explore is how many ticks are available between the low and the close? To do this I created an EasyLanguage strategy that computes this value for each candle and places them within an Excel spreadsheet. Within Excel I can compute the median ticks for each day and generate a histogram showing the distribution of ticks.

The histogram will be broken into “bins” that represent a 15 tick range. Bin number one will contain the number of days that had a Low-To-Close count of 0 through 14 ticks. Bucket number two will contain all days that had a Low-To-Close count between 15 through 29 ticks. The bins are arranged from left to right on the x-axis of the graphs. The bins look something like this:

Bin #1   00 – 14 ticks
Bin #2   14 – 29 ticks
Bin #3   30 – 44 ticks
Bin #4   45 – 59 ticks

The days in our study will be from 08/08/2008 to 01/27/2011.

All Days

This study produces 1,061 days with a median LTC value of 66 ticks. This value translates into $825.  Below is the distribution curve which shows a nice smooth graph which peeks at bin number 3 which is 30-44 ticks. The curve smoothly tapers off into a nice tail as the bin numbers climb. Notice the spike in bin 21. This demonstrates the “fat-tail” phenomena often associated with trading. Put another way, there are always extreme values that happen more often than most people think!

With Trend
In this test I’m going to add a 200-day simple moving average (SMA) to act as a major trend filter. The software will only study candles that are above the SMA. In other words, we want to look at how many LTC ticks are available when the overall market is bullish. This study produces 600 days with a median LTC value of 64 ticks. Below is the distribution curve which shows a nice smooth graph which peeks at bin number 3 which is 30-44 ticks.

Against Trend
Once again, in this test I’m going to use the SMA as a major trend filter. The software will only study candles that are below the SMA. In other words, we want to look at how many LTC ticks are available when the overall market is bearish. This study produces 461 days with a median LTC value of 70 ticks. Below is the distribution curve which shows a nice smooth graph which peeks at bin number 3 which is 30-44 ticks. Notice the fat tail.

Conclusion
I was surprised to discover the median number of ticks between the With Trend (64 ticks) and Against Trend (70 ticks) studies were so similar. This suggests there just might be equal opportunity in both bullish and bearish markets. Looking at the distribution curve for these two studies does seem to show a left-handed shift in the curve when we are against the major market trend. Maybe being more aggressive in profit taking would be warranted in this market climate.

Other ideas to explore could include:

• Is there a time period when the low is often put in? Is it during the first 30 minutes of the European Open? Is it during the U.S. cash session? This would be interesting to look at.
• A similar study could be done in regards to shorting new highs. That is, what is the difference between the intraday high and the close?

In the end it sure looks like there might be potential here. The trading concept would be to open a long position near the intraday low and closing that trade at the median LTC value or at the end-of-day. The vast majority of days close 15 ticks or more above the daily low. That’s a lot of ticks that can be captured!

Of course, finding a system that can do this is another topic. But from the top of my head, common points of support such as weekly pivot levels combined with intraday pivot levels may provide areas of interest. Combining these pivot levels that occur at or near intraday lows may be a good place to consider as well.

Lots of ideas here to keep us all busy for a long time.