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An increasing area of concern for financial regulators around the world has been the widespread promotion of automatic trading systems. These can vary from programs that give very specific advice, such as 'buy here' or 'sell here', to programs that provide what might be better termed 'decision support', suggesting (for example) possible support and resistance levels. Though in the UK at least, the authorities seem to be focusing on whether vendors of such systems should be regulated, a common problem is straightforward fraud, with exotic performance claims made in advertising. Unfortunately, many of these performance claims can be substantiated by hypothetical track records which are produced by applying the trading system to historical data. The problem here is that unscrupulous vendors, armed with the benefit of hindsight, 'curve fit' their trading systems to the data. This may sound innocuous enough, but it is a well-established fact that such optimised systems tend to be unstable and perform poorly when applied to markets in real time. Some vendors, however, are producing genuinely well thought out packages. A case in point is 5D Limited, led by former chemical engineer Dr Nirmal Dhallu, which has recently launched its FIRST methodology (Futures Intra-day Resistance Support Targets). FIRST has been designed specifically for day trading of futures markets. Though the demise of Barings ensured that futures acquired a notorious reputation, and most professionals (and LIFFE) do their best to steer private investors away from them, there is no reason to run scared as long as a certain amount of common sense is applied. Day trading is a good starting point in this process, as all positions are opened and closed during the same day, so there is no risk of some cataclysmic event occurring overnight and hitting you with losses when the markets next open. Though FIRST highlights possible entry points with red and green markers, the software is not a fully automatic trading system - you have to use your own judgement as well. The software uses a series of algorithms to model trader sentiment mathematically. Instead of using lagging indicators, such as moving averages, the software calculates likely points of support and resistance throughout the day in advance, using a proprietary tool called DVM. Once the first price bar of the day has formed, you can opt to display these as a series of horizontal coloured lines on the bar chart. The balance point is a central line called DCP. If the market is above this, trader sentiment is bullish; below it, bearish. On either side of this are four further lines, called UT1/2/3/4 and LT1/2/3/4. If the market starts to move strongly from the DCP in either direction, it is likely to pass through either LT1 or UT1, but may pause for a spot of profit taking at these levels along the way. In the case of UT1, if the previous day closed down and the new day started just above the DCP, then there is a good chance that the market will form a top at this level. An exactly opposite set of conditions applies for LT1. Each successive level beyond that represents an increasingly strong level of support/resistance. The outermost levels (UT4 and LT4) are only likely to be breached when the market is exceptionally volatile. A set of parallel lines might not sound like a lot, but I was astonished at how frequently prices would stop and reverse during the day at almost exactly these levels. The most impressive thing is that these are not being drawn in any way with hindsight. Simply click on the first price bar of the day and check the position of the lines. More often than not a significant market top or bottom will form at one of those levels several hours later. There is a proprietary undisclosed logic that determines when suggested entry points be given. The rule set considers the points of support and resistance provided by the DCP/LT/UT lines and other factors, such as whether the market gapped up or down from the previous day's close when trading started. Entry points appear first as empty triangular arrows, to provide you with a preliminary alert. When the entry is confirmed, the triangle will be coloured either red or green, depending upon whether it is a short or long position. You don't have to wait for confirmation. If, for example, the market has just broken through a key resistance line, you might prefer to take a long position immediately. FIRST also has several other cards up its sleeve, one of the most practical of which is ADM. A major problem when trading/investing is knowing when to start looking for the exit. While most trading systems tend to focus very much on the issue of timing a trade entry correctly, remarkably few consider the question of when to get out. If the market is falling, clicking with the mouse on the high point of the highest preceding bar causes the ADM to appear (as a bold horizontal purple line). It may not always catch the lowest point of the fall, but it often comes close. If nothing else, it provides a good indication of a point at which to start tightening your stops. If you want to keep tabs on how your trading is going, the Trade menu provides comprehensive trade monitoring and record-keeping, and allows you to specify a stop-loss level for your trades. To initiate a trade, select a price bar and click New Trade on the Trade menu; a dialog box then appears, into which you can add information such as point value, whether the trade is long or short, the exact price entry point and your stop-loss. Once a new trade is entered the relevant price is highlighted in red or green, depending on whether you are short or long. You can check current/previous trade details at any time by placing the vertical cursor on one of the highlighted bars and selecting View/Edit from the Trade menu. All trades are also summarised in further window, so you can check your general trading progress. Another unusual twist is that rather than just displaying volume as simple histogram bars, FIRST can also be set up to determine whether the volume is attributable to buying or selling activity. Mietek Szolach's Inside View feeds FIRST with data, and it is through that interface that this feature is enabled (though this only applies if you are using Tenfore, Market-Eye, DBC Signal or BIS data). The display appears as a simple line, but with volume bars attached above and/or below it to indicate the nature of the activity. The advantage here is that if the market starts to rally, you have a tool that allows you to spot whether real buying activity is behind it or the market is simply being manipulated. Apart from its proprietary decision support tools, FIRST also provides a selection of standard indicators and chart types, such as moving averages, RSI, trend lines, momentum, Bollinger Bands and Japanese candlesticks. However, to most traders these will be little more than accessories to the core proprietary tools. One interesting exception is another proprietary indicator on the Tools menu called PDI. It's basically an oscillator, so a move out of its overbought or oversold zones (set at 0.8 and 0.2 respectively) is a buy or sell signal. However, rather than as a trading tool in its own right, it seemed to work best as a filter for the FIRST green/red triangle signals when markets were particularly choppy. Ignoring all signals that conflicted with the PDI reading meant some opportunities were lost, but that quite a few whipsaws were also avoided. I ran FIRST continuously for about a month and kept a rough record of trades that I would have hypothetically taken while using it as a decision support tool. The results were impressive, but altogether more impressive are the results that Dhallu has actually achieved himself using FIRST for trading his personal account. For example, between 1 and 23 March, he traded the FTSE future on 15 days with an average of two trades per day. There were no losing days, and trading just one contract at a time during that period a gross profit before commission of 386 points was accumulated, which represents £3,860. (Longer term trading history is also available for inspection.) FIRST is available from: 5D Limited,Winnington Hall,
Telephone no: 01606 76100;
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