Larry Williams presented a free session at the November 2014 Las Vegas Trader’s Expo in which he discussed 8 possible range types. Many of the ideas are directly testable within EdgeRater PRO Unleashed and this post will show how those ideas can be tested. Please also take a look at the accompanying video tutorial which can be found here:
Who is Larry Williams?
Larry Williams is a world renowned trader an author of many books on stocks and commodity trading. He hosts a free trading course which you can find online at http://www.ireallytrade.com/minitrading.html
Breaking down the market into simple structure
Larry suggested the market can be simplified into only 4 possible daily structures:
- Down Range: Day’s high is lower than the prior day’s high and day’s low is lower than the prior day’s low.
- Up Range: Day’s high is higher than the prior day’s high and day’s low is higher than the prior day’s low.
- Inside Range: Day’s high is lower than the prior day’s high and day’s low is higher than the prior day’s low. Occur approx. 12% of the time.
- Outside Range: Day’s high is higher than the prior day’s high and day’s low is lower than the prior day’s low. Occur approx. 12% of the time.
Within these 4 patterns each last day could either be an up or a down day and so there are actually 8 possible patterns:
- Down Range, Down day
- Down Range, Up day
- Up Range, Down day
- Up Range, Up Day
- Inside Range, Down day
- Inside Range, Up day
- Outside Range, Down day
- Outside Range, Up day
Using these 8 patterns you can create some powerful strategies.
Entry and Exit technique
Larry presented backtested statistics associated with trading these patterns using a simple entry and exit technique. He stressed that they were not the best entry or exit techniques but shown because they were easy to understand and program. This strategy is intended only to show where we have a bias or advantage in the marketplace.
- Entry: At market close
- Stop Loss: Based on $ Stop
- Exit: First Profitable Opening
His message was that we could go home and verify using our own software. His results for testing this on the e-mini S&Ps from 2002 forward were as follows:
|Range Type||% Wins||#Trades||Net Profit||Avg Profit / Trade|
|Up Range, Up Close||80%||667||-$3,000||-$3|
|Up Range, Down Close||80%||312||$32,150||$103|
|Outside, Up Close||81%||201||-$13,000||-$66|
|Outside, Down Close||83%||255||$38,100||$150|
|Inside, Up Close||84%||228||$8,700||$22|
|Inside, Down Close||84%||227||$8,700||$38|
|Down Range, Up Close||82%||330||$32,300||$95|
|Down Range, Down Close||83%||560||$70,000||$125|
So, the Down Range, Down Close day offers the best potential short term ‘long’ setup based on net profit. This was the take-home message of the presentation.
Larry further dug into the Down Range, Down Close setup to uncover which day of the week offered the best trade:
|Day Of Week||% Wins||Net Profit|
The stats support the ‘Turnaround Tuesday’ concept.
And further investigating by Trading Day of Month revealed that 1, 17, 19, 22 and 23 were the best days, showing 92% winners and $47,500 net profits with 107 trades.
It was also found that a Down Range Larger Range day was better than a Down Range smaller Range day. $205 Avg 80% Win, vs $33 Avg 85% win,
Also naked close was better than a covered close (naked close meaning that the close was outside of the previous day’s range). $155 Avg 83% Win vs $30 Avg 83% Win
And combining these two concepts:
Down Range, larger range, Covered close: $60 Avg, 83% Winners
Down Range, larger range, Naked close: $215 Avg, 85% Winners
Testing with EdgeRater
We will use these concepts to perform some testing in EdgeRater. The January 2015 template in EdgeRater is a Range Scan template within the ‘Hot Topics’ category which has been designed to allow you to quickly find stocks that have one of the 8 possible range types mentioned above.
The stocks can be filtered by range type and also sorted by True Range % of Average True Range, which in the example given above will allow you to bring the stocks with the biggest True Range % that also have a Down Range, Down Close to the top of the list.
The following image shows how to filter and sort the template report to accomplish this. The report can be sorted and filtered in any way you choose.
The test scripts:
January’s template comes with some new Chart Scripts that will allow you to backtest some of these ideas. Here are the script names which you will find in your Chart Scripts library:
|LW_DNRANGE_DNCLOSE(N, R)||Down Range, Down Close|
|LW_DNRANGE_UPCLOSE(N, R)||Down Range, Up Close|
|LW_UPRANGE_DNCLOSE(N, R)||Up Range, Down Close|
|LW_UPRANGE_UPCLOSE(N, R)||Up Range, Up Close|
|LW_INRANGE_DNCLOSE(N, R)||Inside Range, Down Close|
|LW_INRANGE_UPCLOSE(N, R)||Inside Range, Up Close|
|LW_OUTRANGE_DNCLOSE(N, R)||Outside Range, Down Close|
|LW_OUTRANGE_UPCLOSE(N, R)||Outside Range, Up Close|
Each of these scripts generates an event whenever the particular range type has been detected and the range is greater than the threshold range. By default the threshold is set to the minimum value (-100%) so that the scans just detect the range type. The parameters N and R allow you to be more specific and say how much above or below the Average True Range the current range should be. N is the Average True Range period and R is the Range Threshold in %.
So, for example if you wanted to detect down range, down close days where the True Range is at least 100% of the 14 day Average True Range you would use the following script:
Here you can see that N has been set to 14, and the True Range threshold has been set to 100% (1=100%)
If you wanted to look for Down Range, Down Close days where the True Range is at least 150% of the 14 day Average True Range you would use the following script:
Armed with the above information you can now add the appropriate script (with parameters of your choice) to the entries part of the Entries and Exits tab. I have chosen -100% as the threshold so that it picks up every Down Range, Down Close day.
Here I have restricted the scan to run only on the symbol SPY as the original testing that Larry Williams did was on the e-mini S&Ps and I wanted to use a proxy for that.
Now that the entry signals have been generated for all historical dates you can use the Trade Simulation tab to set up the backtest:
The settings run the following test:
“Place a long-side trade on the close of the bar that generates the entry signal (Down Range, Down Close) and hold for 100 bars (note that 100 bar hold is just a way of telling the simulator to hold until one of the stops gets hit). Exit on the first profitable open OR when a $500 loss is realized in the position.”
Here’s the trade list that was generated by running the above trade simulation:
The trade summary screen shows that there were 434 trades, 93.32% were winning trades with an average gain of $17.77 per trade.
The daily equity looks like this:
The simulation is just one of many that can be run. For instance if you wanted to see if larger range days have a positive effect on the outcome you could just change the True Range Threshold parameter to be higher (eg, 1.5 (150%) of ATR)). Also, by changing the entry script to one of the other range types (such as Down Range, Up Close) you can easily compare the performance of different range types.
Using EdgeRater and the new January 2015 template it is possible to test the ideas presented by Larry Williams during his free session at the Las Vegas Traders Expo in November 2014. The newly added scripts allow you to specify what type of range you are looking for and the threshold % level of the current range related to the 14 day average true range. The template itself will run a scan for all 8 range types and allow sorting and filtering to find stocks to suit your trading needs.
Of course, many other types of trading system are testable within EdgeRater PRO Unleashed but this one has all of the scripts and the template created for you. If you are not a programmer or don’t want to spend the time creating your own templates and scripts then getting the monthly EdgeRater templates is a great solution.