Supplement to Developing Trading Systems - Part 1

Cho Sing Kum
28^th Jun 2003

This is part of a 3-part series which I wrote in a financial forum on 2^nd April 2001.

Actually questions 1, 3 and 4 are inter-related. The questions are:

1. When it comes to developing trading systems, there is actually no difference between trading and investing. Why?
2. Do you think Singapore stock index futures may be characterized as a volatile market?
3. Why do you think that Trader A and Trader B have differing views when both are JPY traders?
4. Would you agree that both are right in their views and both can still be profitable trading in opposite direction of each other, one buying while the other selling? 

When developing trading systems we are working with price. Sometime we may use volume and open interest as well. But let's say we just work with price data only. Now, price data can be presented in different time frame. There used to be only daily, weekly and monthly price data but since the 1980s, the existence of live data-feeds made intra-day charting possible.

This brings us to the importance of choosing not just the type of market - trending, sideway, choppy - but also that of choosing the time frame of price data important. The following four charts are examples on the Dow Jones Industrial Average (DJIA).

Monthly Chart

This is usually the longest time-frame chart used. Useful when one wishes to have a very long-term perspective. It smooth out many price gyrations. These price gyrations may be huge but they become insignificant on the monthly chart. In this example, Figure 1, the monthly DJIA is bullish.

Figure 1. DJIA Monthly

Weekly Chart

We move down one time frame to the weekly chart. Notice that the price gyrations are now clearer. In Figure 2, the weekly DJIA turned sideway after an uptrend. Some may see it moving within a flag, a continuation pattern, from end-1999 to now. But some may also see a break of the 9640-80 support 2 weeks ago.

Figure 2. DJIA Weekly

Daily Chart

Figure 3 would suggest that the DJIA is stuck - no direction at all. But is it sideway type or is it volatile or choppy? For one who doesn't trade with a system, it can be a tough call. But if you look at the day-to-day price moves, they are erratic most of the time, at least for the period under consideration. Therefore it is a choppy type of market.

Figure 3. DJIA Daily

Hourly Chart

Figure 4, the hourly chart shows an obvious downtrend from 9th March to 21st March followed by an upward correction to hit 9960 on 27th March. It then went into a price congestion. We can go in even finer details by plotting the 30-min, 15-min or even 5-min charts but the smaller the intra-day time-frame the more noise and hence less reliability due to the random nature of minute price moves.

Figure 4. DJIA Hourly

Same Instrument, Different Market Types Because Of Different Time Frame

The above examples show that even with the same instrument, different types of market - trending, sideway or choppy - are presented depending on the time frame of price data we choose. I hope this answers questions 1, 3 and 4.

To Answer Question 2

The question is: Do you think Singapore stock index futures may be characterized as a volatile market?

The Morgan Stanley Singapore stock index futures (SiMCSI) traded on SGX-DT is used as example. Except for the period from 4th quarter 1998 to mid-1999, not shown on chart, the chart does seem to suggest a volatile market. See Figure 5. Even during the big bull run from late 1998 to mid-1999, the price trend was not really that smooth.

Figure 5. SiMSCI Daily

I hope this answer all the four questions in Part 1.

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