The daily bar is shown at left. The
day opens near the low and closes near the high. We enter long at the green
arrow. One possible scenario for the intraday price movement is shown as
Scenario #1. The day moves lower after the open, and puts in the high near the
end of day before closing off the high. In this scenario, the market never
retests the low of the day, so we’re not stopped out.
However, Scenario #2 is also
possible. Here, the market opens near the low, establishes the high of the day
early, puts in the low following the high, and finally moves back up to the
close. In this scenario, we’re stopped into the long trade during the first move
up and stopped out on the way down to the low. Based solely on the
open-high-low-close, it’s impossible to deduce which scenario
occurred.
TradeStation assumes Scenario #1,
which is statistically the most likely. Nonetheless, on some days, Scenario #2
will occur. When it does, TradeStation will show the trade is still long at the
close, based on assuming the first scenario, even though the trade has been
stopped out.
Of course, this is only an issue
when the trade is stopped out on the day of entry. On any day following the day
of entry, it’s simply a matter of checking to see if the low of the day is below
the stop price (or the high is above the stop price for a short
exit).
The lack of intraday information can
also be a problem if you’re trying to day trade off daily bars. One common
source of problems is applying a trailing stop to daily bars when the trade
enters and exits on the same day, as it does for a day trading system. You can
run into the same problem noted above. It’s possible to use the built-in
trailing stop in TradeStation to develop a very impressive day trading system
using a very tight trailing stop. Unfortunately, the results might be total
fiction.
Let’s say, for example, that you’re
working on developing a day trading system for the E-mini S&P and decide to
run it on daily bars. You choose a trailing stop that waits until you have at
least two points of profit then protects half the open profit. This might look
great in the TS performance report. Unfortunately, in real trading, most if not
all of your trades would be stopped out with one point of profit because it
takes very little to move the S&P one point.
However, TradeStation doesn’t know
anything about the intraday ups and downs when it only has the daily bar to work
with. It uses the assumptions of Scenario #1. This means it assumes the trailing
stop for your long trade is in place through the high of the day (see Scenario
#1, above) before it starts to calculate the exit point based on protecting half
the open profit as the market retraces from the high. In reality, you would have
been stopped out long before the market reached the high of the day, even if
Scenario #1 was largely correct.
The lesson from this is simply: if
you’re using daily bars and have a lot of trades entering and exiting on the
same day, take a careful look at the results to make sure TradeStation is
reporting an accurate picture of what’s actually happening in the market.
