ABC Filters

Last modified 13:57, 2 Nov 2012

sitmicon34.gifThis content is provided in support of the Safety in the Market (SITM) module for Your SOFTWARE and may not be applicable to your package. For more information, go to the Modules topic of this help.

ABC Filters

Overbalance of Price

Overbalance in Price means that the current favorable A-B range swing so greatly exceeds the previous swing range movement in the same direction (not necessarily an ABC formation) that the ABC formation can be identified as a potential ABC trading formation even though the relative level of point B's swing does not exceed the previous swing top or bottom.

Normally if the current point B does not exceed the level of the previous swing in the same direction, the formation will not be identified as an ABC formation.

Selecting Include Overbalance of Price Trades allows these ABC formations to be identified because it ignores the normal rule when the overbalance of price level is met.

The multiple by which the A-B swing must exceed the previous swing (i.e. its overbalance) is defined by the user. The default is 3.

This filter is not affected by the Entry Level setting, and will work with either 25% or 33% (or Other) Entry Limit settings.

Expanding Markets

This exception works when the initial Entry Level is set to 25%.

An Expanding Market occurs when the ABC formation contains an "expanding range" relative to the previous range (not necessarily the previous ABC range) in the same direction. In other words, for a long trade the A-B range is greater than the low-high range of the previous upward swing.

In some instances, the trend will be so strong that the 25% limit will be exceeded. Normally this would exclude the ABC formation from consideration. However, some traders feel that the expanding range is so indicative of a strong trend that the 25% limit should be relaxed to take advantage of the trend. The strength of the trend will justify accepting the lower risk-to-reward calculation.

Selecting Allow for Expanding Markets will over-ride a 25% Entry Limit, and allow ABC formations of up to the Expanding Market Entry Limit specified (default is 33%) to be identified.

For an example of its use, refer to the discussion on the Stock Index trade example beginning on page 194 of the Smarter Starter Pack manual (3rd Edition).

Abnormal Ranges

Unusually large ranges often suddenly occur for a number of reasons.

In many circumstances they can indicate some kind of over-reaction and become identified as part of an ABC formation. However, the market may in fact have "over-run", and a trade entered into at this point may often have a dramatically reduced risk-to-reward ratio. To exclude these situations from consideration as legitimate ABC formations, select the Exclude Abnormal Ranges.

This selection will cause the software to first average the range of the number of previous swings set by the user (the default is 50), and then exclude any ranges where the current range exceeds the previous range by a user defined multiple (the default is 1.5) of the previously calculated average range for the security.

This filter is not affected by the Entry Level setting, and will work with either 25% or 33% (or Other) Entry Limit settings.

Outside Limit Trades

An Outside Limit Trade is one where the market opens outside of the Entry Limit (usually either at 25% or 33%), but which then retreats back into the range between the Entry Limit and Entry Stop.

Some traders feel it is acceptable to enter a trade in these circumstances when the price returns to between the Entry Limit and Entry Stop.

Other traders hold that once the Entry Limit is exceeded, the trade should be abandoned. This is so even when the price returns to the entry range, they hold that the trade should be abandoned because the market has in fact reversed and to enter a trade under those circumstances is tantamount to trading against the trend.

Traders who accept the risk and enter into "outside limit" trades should select Include Outside Limit Trades to display these otherwise invalid ABC formations.

Note - By definition the Include Outside Limit Trades selection will only be effective after the trading day.
On the day before the trading day the potential Point C will always be displayed in its ABC formation.
After the trading day, the ABC formation will not normally be displayed if the trading day opens outside the limit.
The ABC formation will be displayed if select Include Outside Limit Trades is selected, and the market prices return to inside the trading range (i.e. - between  the Entry Limit and Entry Stop).

Filter Use

The Filters are available for use in the following features:

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