Testing, research and upgrade of Mark Fisher's ACD system, trading programs

The ACD system was created by Mark Fisher, a well-known American trader. He trades on the floor of the New York Mercantile Exchange (Nymex), where his clearing firm MBF Clearing Corp. operates. He has been involved in trading since the age of 12 and gradually developed his own trading method called ACD. It is described in his book, The Logical Trader-Applying a Method to the Madness. The first chapter of the book is available on the website mbfcc.com of MBF Clearing Corp., where you can also buy the book. I will briefly describe the basics of the ACD method based on the first 3 chapters of The Logical Trader (they cover 81 pages, while the book contains 204 pages, excluding appendices).

The ACD system is considered a trend following trading system and can be applied to any commodity, stock, or currency if there is sufficient volatility and liquidity. In brief, the ACD method plots price points in relation to the opening range. These are Points A and C for entry and Points B and D for stop. Points A and C are price levels above which to get into a long position and below which to be short. The system is symmetrical: what works on the upside also works on the downside.

The opening range is a time interval based on the opening of a given market - see yellow lines in Fig.1. For stocks the opening range is generally the first 20 minutes of the day, for commodities it varies from 5 to 30 minutes. The time period used for the opening range depends upon the time horizon of the individual trader. The opening range should be based on the local market where the trading session begins. The opening range is used as a guideline throughout the day. It is the high or the low much more often than any other time interval of the same length on a trading day, while random walk theory predicts their equivalence. In this regard, the opening range is important and statistically significant. As a result, after breaking through the opening range, the market is likely to continue moving in the direction of the breakout.

Point A is the price level set on a certain number of ticks outside the opening range - see the green line in Fig.1. A down is located below the bottom of the opening range. This is the entry level for establishing a short bias. A up is located above the top of the opening range. This is an entry level for establishing a long bias. More precisely, a long or short position is established when the market reaches A up or A down and trades there for a period of time equivalent to half the opening range time frame. Any day can be either A up or A down, but not both at once. Mark Fisher says Point A is based on some set of variables derived from his proprietary research, based on measuring the volatility of the security in question (see page 14 of The Logical Trader).

Point B acts as a stop after Point A is established. Point B is at the bottom of the opening range for A up or at the top of the opening range for A down - see the yellow bottom line in Fig.1.

Point C is the price level set on a certain number of ticks outside the opening range after Point A has been established, on the opposite side of the opening range relative to Point A - see the blue line in Fig.1. C down is is located below the bottom of the opening range. This is the entry level for establishing a short bias. This can only be done if the market has previously confirmed A up. C up is located above the top of the opening range. This is the entry level for establishing a long bias. This can only be done if the market has previously confirmed A down. Thus, at Point C, the bias changes from bullish to bearish or vice versa. As in the case with Point A, a long or short position is established when the market reaches C up or C down and trades there for a period of time equivalent to half the opening range time frame. Any day there can be either C up or C down, but not both. Mark Fisher says that A and C levels are the same for stocks and different for commodities (see page 16 of The Logical Trader).

Point D acts as a stop after Point C is established. The D level is the bottom of the opening range for C up, or the top of the opening range for C down - see the yellow top line in Fig.1. Once Point D has been hit, the trader must walk away from the market by the end of the trading day.

Failed Point A occurs when the market does not approach Point A by 1 tick and fails to trade at this level, after which it reverses direction and trades back into the opening range - see Fig.2. In case of failed A up the entry level for establishing a short bias can be 5 ticks below A up with a stop at A up. In case of failed A down the entry level for establishing a long bias can be 5 ticks above A down with a stop at A down. This makes it possible to make a profit that far outweighs the risk. Mark Fisher calls such a trade a rubber band (see page 25 of The Logical Trader). He also talks about failed Point A when the market breaks through A value but does not stay there for at least half the opening range time frame, then reverses its direction and trades back into the opening range.

It is similar to failed Point A, just Point C is a reference point after confirmed Point A has been established. All entry and exit rules described above for failed Point A apply to failed Point C as well.

Mark Fisher believes that in trading time is more important than price (see page 19 of The Logical trader). He says that if Point A is established and the market did not acted the way as you expected for a period of time equivalent to the opening range time frame, then get out. The same thing needs to be done in case of Point C, failed Point A and failed Point C, if the market is going nowhere.

The pivot range is an area where the market can find support or meet resistance. On the other hand, if the market has enough strength to break through support or resistance, it is likely to make a significant move in the direction of breakthrough. The pivot range is calculated based upon the high, low, and close of the previous trading period. It may be one day or more. Mark Fisher primarily refers to the daily pivot range - see Fig. 3. It is calculated using the following formula:

Daily Pivot Price = (High+Low+Close)/3

Second Number = (High+Low)/2

Daily Pivot Differential =| Daily Pivot Price- Second Number| >0

Daily pivot range= Daily Pivot Price ± Daily Pivot Differential

where High, Low and Close come from the previous trading day or several days.

If the previous Close is above the daily pivot range, this is considered bullish for today’s trading, and the pivot range is support. If the previous Close is below the daily pivot range, this is considered bearish for today’s trading, and the pivot range is resistance. But if the market breaks through the pivot range, support or resistance is overcome, and movement in the direction of breakout is likely to follow. You can enter a long or short position if the market bounces off the pivot range as support or resistance, respectively. On the other hand, you can enter a short or long position if the market breaks through the pivot range as support or resistance, respectively. In both cases, stop loss is set on the opposite side of the pivot range.

The pivot range can be based on more than one day. Mark Fisher suggests applying a three-day rolling pivot that can be used to determine a trailing stop. The latter moves in the direction of the trade – up for a long position and down for a short position. Such a longer time horizon helps smooth out spikes from market reports and retain position.

When the pivot range is small, there may be a gap on the current day and a much larger trading range than usual. Such a small pivot range may become significant support or resistance in the following days.

ACD theory uses the concept of plus and minus days (see page 49 of The Logical Trader). If the market opens below the pivot range and closes above it, this is a plus day. If the market opens above the pivot range and closes below it, this is a minus day. Mark Fisher claims that if 30 trading days ago there was a plus (minus) day and volatile session, then it is very likely that the current trading day will also be a volatile plus (minus) day. This can be used to predict market behavior for the current day, provided that it opened at the right point relative to the pivot range.

As just described, plus and minus days are most often repeated in 30-days trading cycle. Thus this cycle appears to be statistically significant.

As mentioned above, the opening range is a statistically significant period of time, since most often it is a high or low during a trading day.

Mark Fisher claims that the 1st trading day of the month is more often the high or the low than any other day of the month, and therefore it is statistically significant (see page 47 of The Logical Trader).

He also claims that the pivot range calculated in the first two weeks of the year (after the middle of the year) is statistically significant for the first (second) half of the year (see page 52 of The Logical Trader).

Mark Fisher offers to combine Point A with the pivot range as an entry point into a trade. If A up (A down) is established and the market penetrates the pivot range, then a long (short) position with a stop at the bottom (top) of the pivot range increases the chances of profitable trading – see Fig.4. Mark Fisher calls this strategy “Point A through the pivot”. This allows you to maximize trade size and minimize risk. The risk is lower because the border of the pivot range for exit is closer to the entry point than the border of the opening range or Point B. If the “Point A through the pivot” scenario took place, and 30 trading days ago there was a plus (minus) day, the probability of moving up (down) will be even higher.

This is similar to failed Point A, as described above, but if the market can not overcome the pivot range and reverses – see Fig.5. Stop is set 1 tick above or below the pivot range for short and long positions, respectively.

This is similar to Point A through the pivot, only Point C is the reference point. Point A must first be confirmed. Then, if Point C is established and the market goes through the pivot, we have Point C through the pivot. This happens rarely, sometimes at the end of a trading day. In the latter case, we can expect a gap opening the next day in the direction of trade.

It looks like a failed Point A against the pivot, only Point C is a reference point. Mark Fisher calls this trade risky one and advices to take a profit quickly (see page 74 of The Logical Trader).

Unlike Point A through the pivot strategy, a position is not opened when the market makes Point A and goes through the pivot. Instead, you wait for the market to reverse and go back through the pivot again. Then the opposite position is opened. This strategy can be applied when markets are nonvolatile and choppy. Mark Fisher calls this trade risky and advices to look for immediate gratification because there is no definite guideline for a stop (see page 75 of The Logical Trader).

This concept provides an early indication of trending days and confidence to increase position. To do this, the following 3 criteria must be met:

- The high or low of the first trading hour should be within the daily pivot range.
- During he first hour, A up or A down should be established: if the low or high of the first trading hour are within the daily pivot range, respectively
- At the end of the first hour, the market should be close to the high or low, in case of A up and A down, respectively (no more than 15 % of the difference between the high and low).

If these criteria are met, you can increase position with stop loss at A up or A down for a long and short position, respectively. This strategy is illustrated in Fig. 6. From my own observations, all 3 criteria are rare at the same time. Obviously, the trade is closed by stop loss at A up in the example in Fig. 6.

Thus I described the basics of the ACD system in part, mainly related to day trading. Mark Fisher also applies the ACD methodology to swing trading, when position can be held for many days. One approach is to register and accumulate weight numbers for each trading day. They depend on trading conditions, such as breakthrough of points A and C, and on where the market closes at the end of the trading day. When accumulated weight numbers reach the set values, position is opened or closed. Another approach uses pivot moving average lines. The Logicl Trader also contains other trading tips and entertaining stories.