The Logical Trader Glossary
The ABC’s of ACD
Embraced by elite traders throughout the world, including the
customers of MBF Clearing Corp.
A logical approach to trading that provides traders with low-risk high-reward trading scenarios. This approach can be implemented both in micro and macro time frames.
ACD opening range
A consistent time frame based on an opening of a given market, which is essential to calculating the ACD points, and is used as an area of reference throughout the day.
The ACD system is a trading system developed by the author, Mark B. Fisher, which can be applied to virtually any commodity, stock or currency.
A down (A v )
A price level set at a specific number of ticks away from the opening range that is determined by the A values (see A values) for a particular stock or commodity below the bottom of the opening range. This is an entry level to establish a short position/bias.
A up (A ^)
A price level set at a specific number of ticks away from the opening range that is determined by the A values (see A values) for a particular stock or commodity above the top of the opening range. This is an entry level to establish a long position/bias.
A specific number of ticks that is used to determine the distance to a Point A up (A ^) or a Point A down (A v). The A values will vary depending upon the commodity or stock traded.
Bearish phase of the market
A bearish phase of the market (when prices are moving steadily lower) occurs when several pivot moving averages (see pivot moving averages) of varying time frames are all sloped downward.
Bullish phase of the market
A bullish phase of the market (when prices are moving steadily higher) occurs when several pivot moving averages (see pivot moving averages) of varying time frames are all sloped upward.
The term bus people refers to the amateurs, the uninformed, or the uninitiated in the market who, when it comes to investing, are almost always 100 percent wrong.
C down (C v)
A price level set at a specific number of ticks away from the opening range for a particular stock or commodity below the bottom of the opening range (see C values). This is an entry level to establish a short position/bias. A C down (C v) can be made only if the market has previously had a confirmed A up (A ^) (see A up).
C up (C ^)
A price level set at a specific number of ticks away from the opening range for a particular stock or commodity above the opening range (see C values). This is an entry level to establish a long position/bias. A C up (C ^) can be made only if the market has previously had a confirmed A down (A v) (see A down).
A specific number of ticks that is used to determine the distance to a Point C up (C ^) or a Point C down (C v). C values will vary depending upon the commodity or stock traded. In commodities, C values are different than A values (see A values). In stocks, A and C values are the same for each stock.
Change in trend
This ACD tool utilizes proprietary computer-generated pattern recognition techniques to identify statistically, on average, how long minor or major trends should last in a given market. Based on various pattern recognition studies, the ACD change in trend indicator makes projections for possible turning point sin various markets for the upcoming month. The statistical analysis is based upon over 15 years’ worth of historical price data on all major commodities and equities.
A confused market occurs when the pivot moving averages (see pivot moving average) for varying time frames are diverging, with one sloped upward, one sloped downward, and one sideways.
Daily pivot range
The daily pivot range is calculated based upon the high, low, and close of the previous trading day. The ACD system identifies this price range as the meat of the market from the previous trading day.
Daily pivot range formula
This is the daily pivot range formula to be used when applying the ACD methodology:
The concept of discipline cannot be stressed enough. If you don’t have the wherewithal to keep yourself in check, the concepts, ideas, and methodology of the ACD system will not help you. (See Chapter 7, “The ACD Version of ‘Ripley’s Believe It or Not’!”)
Failed Point A
A failed point A set up can occur based on one of the two following scenarios: (1) the market may approach a Point A value and fail to trade at that value, subsequently reversing its direction and trading back into the opening range. Or, (2) the market may approach a Point A value, trade at that value and even potentially through it. However, it does not stay at the Point A value for at least half of the ACD opening range time frame before reversing its direction and trading back into the opening range.
Failed A against/within the pivot
If the pivot range (see pivot range) proves to be strong enough support or good enough resistance to stop the market at or near a Point A value, the result is a failed A against the pivot. For example, a failed A up (A ^) within the pivot range confirms resistance in that area and increases the likelihood of success if a short position is established at that level. Conversely, a failed A down (A v) within the pivot confirms support at that level and increases the likelihood of success if a long position is established at that level.
A failed Point C setup can occur based on one of the following scenarios: (1) the market may approach a Point C value and fail to trade at that value, subsequently reversing its direction and trading back into the opening range. Or, (2) the market may approach a point C value, and then trade at that value and even potentially through it. However, it does not stay at the Point C value for at least half o the ACD opening range time frame before reversing its direction and trading back into the opening range.
Failed C against the pivot
A failed C against the pivot, otherwise known as the Treacherous Trade, generally occurs under highly volatile market conditions. The market attempts to reverse its bias at Point C, but runs directly into the meat of the market from the previous trading session, otherwise known as the daily pivot range. The market snaps like a rubber band off this area and reverses back towards the opening range, providing the trader with a clear point of reference at the failed C level.
Fear and greed
Fear and greed are the two key ingredients that every trader needs to possess in the right combination in order to be successful. By fear, I mean a healthy amount of respect for the market that you are participating in. A trader must also be greedy and willing to press winning trades and maximize market opportunities.
“Gartman’s 20 Ridiculously Simple Rules of Trading”
Published by Dennis Gartman, author of The Gartman Letter, “Gartman’s 20 Ridiculously Simple Rules of Trading” offer advice and words of wisdom for any trader. (See Appendix.)
Goods news/ bad action
A classic trading scenario that allows the trader to combine the ACD system with market psychology. This setup requires an anticipated directional move by the market based on new fundamental developments. However, for reasons that bewilder most traders, the market fails to technically respond to that news in the anticipated direction.
Island Reversal Formation
An Island Reversal Formation occurs when the market has a fake-out to the upside or the downside, gapping lower the day after previously gapping higher (or vice versa).
Late-day Point C pivot trade
This is the Rolls Royce of all ACD system trading scenarios. This setup’s high probability of success, coupled with its very low risk, make it extremely attractive. The trade works best if it occurs late in the day, trapping speculators who feel they must liquidate by the close.
Liquidity refers to whether there is a tight enough bid/offer spread and sufficient volume on both sides of the market to allow a trader to enter or exit a position without a high degree of slippage. The ACD system requires sufficient liquidity to enable you to enter and exit at or near specific ACD levels. For example, a five-lot trader may find sufficient liquidity to trade a market like platinum futures, while a 500-lot scalper would find platinum “too small” to trade.
Maximize size, minimize risk
The concept of maximizing size and minimizing risk is a vital ingredient to any successful trading strategy. The ACD methodology applies this concept in identifying trading scenarios that utilize low-risk reference areas such as the opening range, pivot range, and other ACD areas.
The ACD system can be applied to longer-term trading, not just micro day-trading or scalping. Traders utilize ACD indicators such as plus/minus days, number line values, change in trend, rolling pivots, first two weeks of the year, and pivot moving averages slopes in adopting a macro bias for a given market.
Mad as hell (MAH) trade
The I’m mad as hell (MAH) and can’t take it anymore trade is a trading scenario identified by the ACD system in which traders who have been fighting the prevailing trend become utterly frustrated and eventually capitulate. This scenario usually occurs after there has been an extended holiday or break. During this time off, traders have had the time to stew over their losses and have decided to throw in the towel as soon as the market reopens.
The ACD system can be effectively utilized on a very short-term basis by floor- and day-traders. Critical components to micro ACD include Point As, Point Cs, the opening range, the daily pivot range, pivot first hour highs and lows, Point Bs, and Point Ds.
The ACD system defines a minus day according to the following formula: Opening Range > Pivot Range > Close = Minus Day
This macro ACD indicator can be utilized by longer-term traders to help them identify when to exit trades. In the ACD system, momentum is used to clearly show who the winners and losers are in a market over a specific period of time. This ACD tool compares the close of the market today in relation to its close eight days ago to determine whether the shorts or the longs have the upper hand.
Moving averages are traditionally based on closing prices. Rather than basing moving averages on closes, which are nothing more than arbitrary points in time, ACD uses pivot moving averages (see pivot moving averages).
Moving average divergence (MAD) trade
This ACD technique allows the trader to fade extreme moves in market direction. The moving average divergence (MAD) trade works best when the pivot moving averages are confused (with one sloping upward, one downward, and one flat), as there is less opportunity for a trend to reestablish itself quickly. It is also critical for a MAD scenario to have a well-defined point of reference. Furthermore, you should enter the trade with either a good or failed Point A, or a good or failed point C, depending upon market conditions. The ideal MAD trade also incorporates the concept of an island reversal formation (See Island Reversal Formation).
Moving average fake-out (MAF) trade
The moving average fake-out (MAF) trade utilizes pivot moving averages (see pivot moving averages) defined by the ACD system. The slope of all the pivot moving averages must be clearly defined in one direction. After a significant move in the direction of the slope of the pivot moving averages, the market begins a retracement and breaks either above or below the shortest-term pivot moving average. However, the market does not retrace far enough to violate any of the other pivot moving averages, and eventually snaps back in the direction of the prevailing pivot moving average slope. This provides the trader with a clear point of reference to establish a position in the direction of the prevailing trend.
A neutral market is evident when all the pivot moving averages (see pivot moving averages) for varying time frames are parallel to each other and flat. At this time, the ACD methodology dictates traders remain on the sidelines and wait for a breakout.
The concept of Next! Is based upon the premise of seeking immediate gratification once you enter a trade. The ACD system refutes the no pain, no gain notion that says in order to be successful one must endure all the emotional abuse and financial pain that the market can inflict upon you while waiting for losing positions to turn into winners. Under the concept of Next! If the market doesn’t move your way within a short time of putting on a trade, just get out and move on to the next one.
The main purpose of the number line is to identify a potentially developing trend. That generally occurs when the cumulative sum of the past 30 trading days based on macro ACD (see macro ACD) goes from a 0 to a +/- 9, a level it must maintain for two consecutive trading days in order to be considered significant.
Outside reversal week
This ACD setup examines the relationship between the current trading week and the prior week of trading. As highlighted in the examples of Enron and the 1929 and 1933 Dow Jones Charts (see Chapter 6), this scenario provides the trader a low-risk point of reference to identify potential major market reversal areas.
Pivot first hour highs and lows
In this setup, the trading activity over the first hour of the day is used to determine whether the daily pivot range engulfs the first-hour high or low. A subsequent A up or A down confirms an intraday bias and affords the trader an excellent low-risk trade entry point.
Pivot on a gap
When the Market gaps open, above or below the daily pivot range, and never trades into the daily pivot range from that day, a pivot on gap day has been established. That pivot on gap day level becomes critical support or resistance for future trading sessions.
Pivot moving averages
Pivot moving averages are moving averages that use the pivot rather than the close for calculation purposes. These pivot moving averages truly represent where most of the volume traded each day.
The ACD system defines a plus day according to the following formula: Opening Range < Pivot Range < Close = Plus Day
Point A through the pivot
If the market trades through both the Point A (up or down) and the daily pivot range (see daily pivot range), there is a low-risk trade to establish a position in the direction of the confirmed A. Instead of risking to Point B, a trader needs only to risk to the opposite side of the daily pivot range.
Point B is the price at which your bias shifts to neutral. Once a Point A (up or down) has been established, your stop is now Point B. The B level is the bottom of the opening range for an A up, or the top of the opening range for an A down.
Point C through the pivot
If the market trades through both the Point C (up or down) and the daily pivot range (see daily pivot range), there is a low-risk trade to establish a position in the direction of the confirmed C. Instead of risking to Point D, a trader need only to risk to the opposite side of the daily pivot range.
Point D is the price at which your bias shifts to neutral and is your stop after the market has already established a C in one direction. Once Point D has been hit, the trader has been chopped up enough for the day and should walk away from the market for the rest of the trading day.
Points of reference
The cornerstone of ACD is the concept of where to get out if you are wrong. ACD provides traders with reference levels to lean against to minimize their trading risk.
Random walk theory
The random walk theory states that the market’s movements are random and totally unpredictable. It goes on to state that, over the long run, no one can outperform the general market. In my opinion, the ACD methodology directly refutes this theory (see ACD methodology and statistically significant).
Over the past two to three years, this has clearly been the best system to trade. Whether traded in open outcry pits or over a screen, it hasn’t mattered. This trade is not the typical reversal scenario that you have read about in other books or trading publications. The ACD reversal trade identifies market failure patterns that enable the trader to enter positions before the crowd begins to panic and thus benefit from the ensuing market move.
Rolling pivot range
The rolling pivot range, usually spanning three to six trading days, acts as a reference point for entering and exiting trades. ACD uses the rolling pivot range as a trailing stop for winning positions. It also provides traders a point of reference to quickly exit losing positions. One of its best functions is that it helps prevent a trader from turning winning positions into losing ones.
This ACD setup relies upon divergences occurring between market price action and human sentiment. This trade tries to catch traders who don’t believe in recent market price behavior and who have faded the recent move. This setup alerts the trader if the market gaps away from these traders and tries to capitalize on the ensuing panic liquidation that inevitably takes place.
Significant time frames
A short-term scalper should not pay attention to long-term indicators, or vice versa. In order to be successful, a trader must use indicators that best suit his trading style and be consistent in its application. For example, a longer-term trader may make significant use of the first two weeks of the year indicator (see Natural Gas example, Chapter 2, Figure 2.5), while the short-term trader may not use this indicator at all.
When using pivot moving averages (see pivot moving averages), the critical element is the change in slope of those lines. A change in slope measures the rate of change in market perception.
Small pivot ranges
A trading day that has a normal trading range but produces a very narrow daily pivot range for the following day usually is an indication that there will be a more volatile trading session the following day.
The ACD methodology is based upon the premise that the opening range of each day’s trading session is statistically significant. In layman’s terms, this means that the opening range is not like all the other 5- or 10-minute intervals of the trading day. Rather, the opening range is the statistically significant part of the trading day, marking the high or low for the day (in volatile markets) about 20 percent of the time. This concept directly refutes the random walk theory (see random walk theory).
In the ACD system, sushi roll is the name given to a particular early-warning indicator of a change in market direction. The sushi roll utilizes five rolling trading days (or for a shorter-term perspective, five 10-minute bars). The sushi roll compares the latest five increments of time to the prior five increments of time to determine if the market is changing direction.
This trade should be made when markets are choppy and directionless. Under these conditions, Point As and Point Cs have very little follow-through. In fact, under these conditions the markets often reverse and stop you out. System-failure trades try to identify when the market fails at these levels and fades those moves. System-failure trades tend to work best when the slope of the pivot moving average lines are in a confused state (see confused state).
Three-day rolling pivot
The three-day rolling pivot may be used by those who take intermediate-term positions, spanning several days or even in the case of some profitable trades, weeks. As the name suggests, this pivot is made up of the high, low and the close of the past three trading days (see pivot range).
In trading, time is actually a much more important variable than price. When determining whether you have made a good A up (A ^) or a good A down (A v), it is much more important how much time the market spends at that level than at what price it trades. Unsuccessful traders tend to rely too much on price and not enough on time when entering or exiting the market.
Trend reversal trade (TRT)
In this ACD setup, the market must gap to a new high or low, make a good A up (A ^) or A down (A v) in the opposite direction of the gap, and must be followed by a failed C up / down later in the trading session. If the market then retraces back to the opening range, the trader should fade the failed C and look to capture a significant market reversal.
Two-way swing area
A two-way swing area is a price level that acts as a critical support/resistance level for the market. A two-way swing area is established after the market gaps below prior significant support or gaps above prior significant resistance (see NASDAQ Composite scenario, Chapter 6)
Volatility measures how much movement the market has over a certain period of time. A market may have good volume, but if it doesn’t move intraday, it would not make sense to apply the ACD methodology to trading that market.