ACD System, Broken Down


A legendary pit trader named Mark Fisher developed an opening range breakout strategy called the ACD Method in the late 80's. Paul Tudor Jones  has listed Fishers book as one of the five essential books of trading, so I figured I should give the system a try and break it down.


ACD System (Crash Course Part 1)


The Opening Range

Fisher recommends taking the first 20 minutes of the trading day to be your opening range. For example, the first 20 minutes the opening range is 3.0  3.1  and that will be your opening range. However, the time period you use will vary depending on the time frame of your trading. If you are a day trader you might use a five-minute range or a ten-minute range. No definite time frame is given by Fisher.

The opening range is based on the market where the stock is domicile. Even if a stock trades in Japan and the U.S., if its a Japanese stock, you use that market to create the opening range.

Fisher claims that the opening range is the statistically significant part of the trading day because the opening range makes the high or low for the day about 20 percent of the time. The premise of the ACD system is that once the security breaks out from opening range, the market is likely to continue in that direction.

The A point is plotted above and below the opening range. If the stock breaks the A point and then consistently trades there half the time used to determine the opening range, then the market has established an A up. Conversely, the market would establish an A down. Once you have an A up or an A down, that is the only A that you have for the day.

The D point is your stop for getting out of an unprofitable trade. The stop to exit is the opposite end of the opening range. Note: If you have an A up, then the D point would not be where the A down would have been.That is the C point. Above and below the opening range is an added number that I will talk about in the next post.

The C Point -  Once an A has been made, the next possible entry point (after the A point) is point C. Point Cs are calculated (just like As) based upon a certain number of ticks above or below the opening range. Point C is the crossover point at which your bias shifts from bullish to bearish, or vice versa. The stop position for point C is the same as the stop position with Point A  its the point that coincides with the opening range opposite. Point C is always in the opposite direction of Point A.


ACD System (Crash Course Part 2)


Time Factor

It is insufficient for a security just to reach a certain price. It needs to remain at that price or a certain amount of time. Fisher repeatedly emphasizes that time is the most important factor in trading.

Minimally, the market must trade at a certain level for a time period equivalent to half the opening range. Maximally, if the market has not acted the way you would expect within a time frame equivalent to the opening range, then get out. So within the time frame equivalent of the opening range, the stock needs to remain above or below the A and then also begin to move away from the A.

For a valid A up, the price needs to hold past that point or at least half the time of the opening range. The same goes with Point C  the price needs to stay past that point for at least half the time of the trading range.

Failed point

Establishing a short position on a failed A up or a long position on a failed A down offers the potential to make a profit that far outweighs the risk. A rubber band trade is made when the market approaches or just touches target A and snaps back. In that instance, you would go short just below the A up or go long just above the A down. Your stop on the trade would be A up/down point. Or, youd exit the trade if the market didnt move in the direction you anticipated with your time frame.

Points of reference in ACD give you something to lean against as you make your trades. At all times, you know where youre getting out if youre wrong. The result is confidence to trade.

The following five ACD rules should greatly improve your trading:

(1)  Plot Point As and Cs as point of reference

(2)  Lean against these reference points as you execute your trades

(3)  Maximize your size when the trading scenario is favorable. At all times, minimize risk

(4)  Know where you are getting out if youre wrong

(5)  If you can answer 4, you will trade with confidence.

Example: lets say that a stock makes a mark in the A up range, it stays there for enough time so you go long. You make a little profit and get out of the trade, then the stock drops. It drops all the way down to point C  either it gets into the C range and doesnt stay there for enough time or it doesnt quite hit the C point. Either way, this can be a good time to go long the dip. Your get out point is going to be the C point  the point where your bias will turn from bullish to bearish.

Time, Emphasized

If the market has not made the move you expected within a reasonable amount of time (as it relates to your trading time frame), then exit the trade. If you hang on too long waiting for the desired outcome to materialize, then you run the risk of becoming a retail bus person  as Fisher likes to call it. If you put on a trade and the market just sits there, you run the risk of more people acting the same way that you have  buying where you bought  or selling where you sold. And if this is the case, the result is inevitably a trade that goes against you. When you trade, pick your time frame and stick with it. Dont become one of the bus people by hanging onto a position too long. Remember, the bus people are most always wrong. Sometimes the market will repeatedly fake you out. These kinds of trades are the F trades  its giving you the finger.

Luckily those days do not happen that often as long as the market meets the following requirements:

(1)  Sufficient liquidity.

(2)  Intraday volatility. For example, the Eurodollar has great volume, but very little intraday volatility.


ACD System (Crash Course Part 3)


The Pivot Concept

Pivot Points pinpoint key areas of support / resistance to act as a guide for your trading strategy. Just as the Point As and Point Cs helped to determine where you have long or short bias, the pivot range will also help to identify key value areas. Pivot points are pivotal in terms of the market direction.

Calculating the Pivot Range: See Pivot_Range_Calc.png

Mood of the market: If yesterdays close was above todays daily pivot range, the market is bullish for today.  And vice versa for bearish. Example  market closed at 20.75 and the range for today is 20.45 to 20.60 then there is a bullish tone.

The next step is to factor the daily pivot range into your trading strategy for today. The pivot range would either be support (below the close) or resistance (above the close). If the market settled within the daily range, it would be neutral.

During the trading day you have to validate or dismiss yesterdays action. For example, yesterdays close settled strongly above the daily pivot range. For this bullish sentiment to be validated, the market would have to find support at the daily pivot range at the daily pivot range and not below it. If the opposite happens and the market breaks through the daily pivot range then yesterdays bullish indication would be invalid. If this second scenario occurs, that means price has broken through its bottom support and this would be a good time to go short.

Pivot Range Strategies

Example  The stock easily slices through the pivot range. If it begins trading below the pivot range, you want to short the stock. The stop position would then be the top of the pivot range.

Example  The stock closes yesterday above its pivot range, setting a bullish tone for today. The next the stock opens above the pivot range, it drops steadily approaching the pivot range top resistance line but it never crosses it  showing that there is a seemingly strong resistance. It then starts going upwards  this is a classic rubber band strategy  go long on that play.

When a stock goes through the pivot range you wait. The pivot range is a neutral area. You need to wait until the stock exits on one of the sides.

Small Pivot Ranges and Pivot on Gap Days

Trading days that have a normal trading range but produce a very narrow daily pivot range for the following day  for that following day there will probably be a larger price range for the day.

The pivot on a gap day is an important resistance going forward for future trading. Keep the trading range resistance area in the back of your head as a strong resistance point going forward.

Significant Time Frames

There are significant time frames, particularly for a longer-term perspective that can be used to gauge your bias. Among them is the first trading day of the month, which is more frequently the high or low for the month then youd think. In other words, the first trading day of the month is statistically significant to the rest of the month, just as the opening range was statistically significant for the rest of the trading day.

Three day rolling pivot

Another pivot concept. It can be used by those who take the intermediate term position, spanning several days or even weeks.

This pivot is based on three consecutive trading days. To calculate, use the highest high and the lowest low of the three day trading period, and the settlement of the third trading day. These three reference numbers are then plugged into the pivot range formula (as calculated before) to calculate the three-day rolling pivot-range.

You can use this three-day pivot range to determine entrance into a trade, using the three-day pivot as the point above which youd establish a long position/bias and below which youd have short position/bias.

You can also use this strategy as a trailing stop. The pivot range can become your trailing stop. Lets say you have shorted the market. The stop and get out of the trade point would be when the price hits the top of the three day pivot range.

Plus and Minus Days

This is a simple scoring that is based on how the market performed on a particular day in relation to the pivot range. Fisher calls this assigning a value to the pivot. If the market opens below the pivot but closes above it, its a plus day. Put another way, if the opening is less than the pivot and the pivot is less than the close, its a plus day. If the market opens above the pivot, but closes below it, its a minus day. Everything else is Zero day. This scoring system is used on a 30 day-day trading cycle. For this system to work, there are two key considerations: (1) be aware if 30 trading days ago if it was plus or minus (2) for history to repeat itself on the current day, the scenario must line up from the opening. For example, if 30 days ago you had a plus day and today the stock opens up above the pivot, it will not be a plus day ever, so it did not line up.

Longer term pivots

You can apply a pivot to a longer period of time whether it be weeks or even months. The concept remains the same  you calculate the pivot range using the highest high and the lowest low of the time frame, and the settlement on that time frame.

Certain time frames are statistically significant. In particular, the pivot range calculated on the first two weeks of the year or after mid year (meaning, the first two weeks of July) is statistically significant for the second half of the year.

Once you have calculated the pivot range for this extended period of time, you would determine the price target at which you would have a long bias or a short bias. These targets are known as the A up and the A down. These A up and A down targets take into account a longer-term view.

How would you cover a long term position once its established  the answer is when your time frame ends, which is at the end of Dec. or June. Otherwise, you would cover and exit the trade the trade when it traded back above pivot point range, your point of reference.



ACD System (Crash Course Part 4)


A and C are points calculated above and below the opening range. Where exactly outside the opening range is far from clear. In his book, Fisher does not give instructions for how to calculate the opening range. He only gives the A & C points at the time his book was published and for specific securities only. On page 12 of the book, Fisher states, Based on this opening range, the A point to enter a long or short position is plotted above or below the opening range, based on set of variables. These variables are based on our own proprietary research, the process of which I wont share with you. If you want to know what Fisher believes are A & C right now you would have to become a member of mbfcc.com, which costs $525.00 a quarter (They offer a 30-day free trial subscription). Additionally, they provide A & C parameters only for futures. If I wanted to trade the ACD method, say, for SPY or GBP/US, Fishers website would not help.

The ACD method is powerful because it calls for layers of indicators leading to highly probable trading opportunities. The magic, therefore, is not where you place the A and C, but rather what you do with the A and C. Whatever way you choose to calculate A & C, stick with it.

Proposed Methods:

(1) Toby Crabels opening range breakout is similar to the ACD method. The stretch is the difference between the opening range and when you enter the trade. To calculate the stretch, average for the previous 10 days the sum of the differences between the open with the closest extreme (the high or low) for the day.

(2) The Opening Range is extended by a factor based on a percentage of the Average True Range of the past 3 to 30 days,  depending on your goals and the instrument traded. Fisher mentions A being 22% of the 30d ATR for the ES, in 2003. These extensions form the basis of the A and C in the strategies.

(3) Fisher has supposedly been quoted as saying that for Forex trading with his ACD system, you can in general take 10% of the ATR(10) for the A figure, and 15% of the ATR(10) for the C figure, and that this system will be about as reliable as any other way of working it out.