Price patterns in soybeans

6 Pages·1990·0.103 MB·English

by  Crabel T.

Stocks & Commodities V. 8:6 (222-224): Price patterns in soybeans by Toby Crabel
Price patterns in soybeans
by Toby Crabel
I
n my search to determine whether price patterns signal the next day's market direction, I have tested all
combinations of four closing prices followed by either a higher or lower open the day after the last close.
I used the soybean market between 1970 and 1988 and studied 32 patterns based on open, high, low and
close. The only criterion to determine the direction of the next day's trade was gross profits.
The five-day patterns in Figure 1 are symbolized by a + for an up closing relative to the previous day and
a - for a down closing, with the exception of the last symbol in the pattern, which is the open and the
point of entry for the day of the trade.
For example, pattern 30 starts on day 1 with a lower close than the previous day (-). Day 2 has a lower
close than day 1 (-). Day 3 has a lower close than day 2 (-). Day 4 has a higher close than day 3 (+). Day
5's open is lower than day 4's close (-). A sale is assumed and entry is taken on day 5's open with trade
exit on day 5's close.
Because a positive gross profit was the only criterion determining trade direction (buy or sell), all patterns
in Figure 1 show a profit. In some cases, the percentage of profitable trades is below 50%, but the high
value of average wins pulls gross profits into the black. In other cases, average wins are less than average
losses, but the high percentage of winning trades produces a positive gross profit. These are borderline
patterns that may or may not have any predictive value. A trader should consider the percentage of
profitable trades, the average win-to-average loss ratio and gross profits when assessing the validity of a
pattern.
A natural limitation exists in soybeans that does not exist in Treasury bonds; the potential intraday price
move is larger in T-bonds than soybeans. All things considered, soybeans perform as well, if not better,
than T-bonds in this type of basic test (Figure 2).
If the five-day patterns had similar biases in each market, that would suggest some consistency in price
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Stocks & Commodities V. 8:6 (222-224): Price patterns in soybeans by Toby Crabel
behavior from commodity to commodity. As it turned out, eight of the 32 patterns had significantly
different biases, which suggests some difference in behavior exists between the two markets. Marked
differences showed up in patterns 3,4, 15 and 17, which gave opposing buy/sell signals in the soybean
and bond markets yet maintained reasonably high percentages of profitable transactions in both markets.
The most profitable soybean winners in Figure 1 were sales (patterns 1,10,25 and 30). There were no
buys over $10,000 gross profit. Percentage of winning trades seemed to favor the upside, but gross profits
definitely favored short sales. T-bonds displayed a better balance in the category of gross profits.
A trader should consider the percentage of profitable trades, the
average win-to-average loss ratio and gross profits when
assessing the validity of a pattern.
Soybean pattern 30, shown in detail in Figure 3, is a sale on day 5's open and tested better than most,
especially in the average win/loss category — 59% of its 94 trades were profitable, with winners
averaging $403 and losers averaging $210. Gross profits were $13,987.
An attempt to improve on this pattern produced some interesting results. If you find an expanding daily
range on day 4 relative to day 3 (Figure 4), it accounts for 63 of the 94 trades in pattern 30. The number
of profitable trades dropped to 51%, but gross profit was relatively stable at $8,206, since the average win
was $421 vs. the average loss of $170.
Percentage profitability increases dramatically when day 4 is a narrowing range rather than an expanding
range (Figure 5). This accounts for 30 trades with 67% profitability. Gross profits were $5,581, with a
$445-to-$332 win/loss ratio. This is adequate but not nearly as rewarding as T-bonds. Figures 1 and 2 can
serve as useful references. The best results come from small changes of the basic patterns. Range
differences defining momentum and one-day patterns are very useful.
In summary, a trader can assume some patterns indicate a decisive bias from open to close in the soybean
market. These biases were as distinct as in the bond market and showed that five-day patterns are more
profitable on the downside. Generally, five-day patterns do not produce high profits but can still be used
as a basis for system development. Keep in mind, however, that this type of system development has not
proved to be as promising in soybeans as in other markets.
Toby Crabel is a CTA and AP with RB&H Commodities and a principal in Toby Crabel & Associates. A
former trader at the CME and CBOT, he now edits Market Analytics, 30 S. Wacker Dr., Suite 1912,
Chicago, IL 60606, [phone], ext. 1410.
References
Crabel, Toby [1989]. "Opening range breakout," Technical Analysis of Stocks & Commodities: Volumes
6 and 7.
___ [1989] . "Price pattern studies ," Technical Analysis of Stocks & Commodities: Volume 7.
___ [1989]. "Trading close-to-close patterns," Technical Analysis of Stocks & Commodities: Volume 7.
___ [1989]. "Inside day patterns in the S&P," Technical Analysis of Stocks & Commodities: Volume 7.
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Stocks & Commodities V. 8:6 (222-224): Price patterns in soybeans by Toby Crabel
FIGURE 1: A trader should consider the percentage of profitable trades, the average win-to-average
loss ratio and gross profits when assessing the validity of a pattern. Because a positive gross profit was
the only criterion determining trade direction (buy or sell) all patterns here show a profit.
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Stocks & Commodities V. 8:6 (222-224): Price patterns in soybeans by Toby Crabel
FIGURE 2: Significantly different biases between two commodities suggest different behavior in the two
markets.
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Stocks & Commodities V. 8:6 (222-224): Price patterns in soybeans by Toby Crabel
FIGURE 3: Soybean pattern 30 is a sale on day 5's open. In the average win/loss category 59% of its
94 trades were profitable with winners averaging $403 and losers averaging $210. Gross profits were
$13,987.
FIGURE 4: If you find an expanding daily range on day 4 relative to day 3, it accounts for 63 of the 94
trades in pattern 30.
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Stocks & Commodities V. 8:6 (222-224): Price patterns in soybeans by Toby Crabel
FIGURE 5: Percentage profitability increases dramatically when day 4 is a narrowing range rather than
an expanding range.
Figures Copyright (c) Technical Analysis Inc. 6