| from an article in FUTURES &
OTC WORLD / August 1999
FIRST FOR KNOWLEDGE
While necessity may be the mother of invention, in the futures markets adversity seems to provide the incentive of a complete genealogical tree. You only have to glance at the virtual bookshelves of your online bookstore to be submerged in a glut of prose about how this or that doughty futures trader came back from the dead to (re)make their fortune. However, in most cases the ruin they so narrowly evade is of their own creation. The trader who has their capital obliterated by the collapse of their broker and who then returns to not only trade profitably in a totally different style and market, but who also builds a successful software company on the back of their trading methodology is an altogether rarer beast. The collapse of Financial Management International in January 1995 posed just such a challenge to Dr Nirmal Dhallu of software vendor 5D Limited. Prior to that date, Dhallu had been successfully margin trading FTSE stocks, but the demise of both his capital and FMI necessitated a rather drastic strategy revamp. With much reduced capital, Dhallu focused his attention upon developing a viable day trading methodology to benefit from the lower margin requirements for intra day trading. One of the first thing that Dhallu observed was just how few of the existing day trading methodologies available had actually been designed from the ground up for that purpose. “Most of them were adaptations of end of day charting methods that originally evolved in the early part of this century,” says Dhallu. “Many of them rely on pattern recognition techniques, but patterns formed on daily or weekly charts are not necessarily valid when one artificially cuts up the day into five or ten minute intervals.” Instead, Dhallu turned to an area of mathematical modelling he had explored as part of his PhD - which was concerned with the energy targeting of chemical plants in order to determine optimum plant design. The net result was 5D’s FIRST methodology, which combines the prediction of intra day support and resistance levels with time. While support and resistance levels are obviously nothing new, adding time to the equation is less common. Simply breaching a support/resistance level in FIRST is not in itself sufficient to generate a trading alert – it’s not uncommon for the market to move to and fro through a particular level on several occasions during a trading session, without generating a signal. FIRST makes its calculations for the current trading day after the formation of the opening price bar. As a result it’s quite common for it to generate signals as early as the second bar. By contrast, day trading systems that rely upon lagging indicators such as averages often have insufficient data (unless they can successfully accommodate the distortions of overnight gapping) to trigger signals until late morning, by which time much of the action (often for the entire day) is over. FIRST uses three different rule sets to generate signals. Though the methodology is not fully disclosed, these signals are at least partially based upon the volatility of the market weighted over the last one thousand bars. All three rule sets operate independently and any one can generate a signal. The methodology is normally presented within its own custom charting interface, though it will shortly also be available in an add in version for Omega Research’s TradeStation 2000. Though FIRST highlights possible trade entry points with red and green markers, it does not have to be treated as a fully automatic trading system, it’s also of value for more general decision support. One proprietary tool that falls into this category is the ADM, which projects the likely extent of a move. If the market is falling, clicking with mouse on the high point of the highest preceding bar causes the ADM to appear (as a bold horizontal purple line). I found that using the ADM as a target point at which to exit or lighten a position (or at least to tighten a trailing stop) yielded consistently better results than simply waiting for the market to turn and hit a fixed parameter trailing stop. You can actually reapply the ADM more than once during a particular move - for example, in a downtrend clicking on reaction high bars as they form. The only downside is that with each new application of the ADM the probability of the target actually being attained is less. By the same token, it’s not uncommon to exit a position at the first ADM projection, only to watch the market run on a further hundred points. However, the bottom line is that you can still use the tool effectively in whatever fashion happens to suit your personal trading style. It’s also extremely useful for determining the potential risk/reward ratio on a trade and so filtering out trading signals where the numbers don’t add up. (SEE SCREENSHOT – WHEREVER IT IS YOU PUT IT MR PELHAM). Another interesting proprietary tool is the DI, which is basically an oscillator, so a move out of its overbought or oversold zones (set at 0.8 and 0.2 respectively) represent a buy or sell signal. However, rather than as an outright trading tool, 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 DI’s reading meant some opportunities were lost, but that a significant number of whipsaws were also avoided. Through the use of Mietek Szolach’s Inside View and Omniview programs, FIRST is compatible with any real time data feed that supports DDE. An interesting twist is that when used with certain data feeds and Inside View, FIRST can be set up to determine whether the volume for each price bar is attributable to buying or selling activity. The display appears as a horizontal line, with volume bars attached above and/or below it to indicate the nature of the activity. Since the burgeoning electronic exchanges can now provide far more reliable intraday volume data (both tick and contract) than open outcry systems ever could, this feature is now of value as a confirmation tool. I found that being able to determine whether there was significant buying or selling underlying a move proved a useful additional filter for FIRST’s trading signals. Apart from its proprietary decision support tools, FIRST also provides a selection of standard indicators and chart types, such as moving averages, ROC, trend lines, inverse %R, Bollinger Bands, and Japanese candlesticks. However, to most traders these will be little more than accessories to the core proprietary tools. FIRST’s Trade menu provides trade monitoring and record keeping functionality, 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 dialogue 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 bars are highlighted in red or green as the trade progresses– 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 a further spreadsheet window, so you can check your general trading results. The only disadvantage is that you can’t enter a new trade in a contract while an existing trade is running, so the system can’t handle adding to or reducing an open position. (Though this of course does not apply to the TradeStation version of the product, where the Tracking Center can handle multiple order adjustments.) Having run FIRST continuously for some two and a half months, it became apparent that the quality of the signals was not only good but also consistent. Though ten weeks is hardly a rigorous testing period for a trading methodology, for an intraday trading system it still represents a respectable amount of activity. The consistency was particularly encouraging, there being no discernible difference in quality between historical and real time signals, which made it seem unlikely that FIRST had been over optimised with the benefit of hindsight. This was particularly intriguing as the introduction of the FTSE future onto LIFFE Connect fell right in the middle of the testing period! FIRST has only recently appeared on the market, but it does at least have a real time (though brief) documented track record of actual trades taken by Dhallu – as opposed to the more common (and largely meaningless) hypothetical track record. For example, the methodology was traded on one contract of the FTSE future for twenty-two days in March this year, with only one losing day. The test account opened the month with a balance of £2685.77 and closed with £6491.78. First is available from:
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