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Bouncing-Ticks



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There has been some discussion on bouncing ticks. B Fulks explains it well 
from a old posting. It helped me a lot .
Here it goes............
Mike


> Subj:  CL_Re: Bouncing-Ticks
>  From:    bfulks@xxxxxxxxxxxx (Bob Fulks)
>  At 11:16 AM -0400 6/13/99, Mben@xxxxxxx wrote:
>  
>  >Can anyone explain how bouncing ticks works ? Anyone have any idea as to
>  >how close this comes to replicating actual trading on daily data ? What
>  >assumptions does TS make about order execution on daily bars when more
>  >than one order is triggered ? Is this information documented anywhere ? I
>  >checked on-line help and the manual but could not find anything. Does
>  >anyone know if Bill Brower ever wrote this up in TS Express ?
>  
>  
>  There is a fairly complete description in the on-line help system in
>  TradeStation 4.0 the text of which is reproduced below. Please see the
>  actual help data for several pictures.
>  
>  Omega often gets criticism for this and you might not agree with using the
>  technique. But they clearly admit that it is a "simulation of market
>  activity" to get around the problem of not having detailed price movement
>  within a bar. And as a "simulation", it might be as good as you can get
>  without more detailed information...
>  
>  Bob Fulks
>  
>  -----
>  
>  Understanding How TradeStation Simulates Market Activity with Historical 
> Data
>  
>  When you apply a trading system to a chart of time-based bars based on
>  historical data, TradeStation uses a set of rules to simulate market
>  activity. It is important to understand how TradeStation handles the
>  simulation of market activity on time-based bars when you are testing a
>  trading system on historical data, for example 60-minute bars or daily
>  bars, based on historical data (non-real-time/delayed data, either
>  intra-day or daily).
>  
>  It is equally important to understand this simulation if you use historical
>  data on time-based bars when you make the trades signaled by a trading
>  system because if you trade a system on time-based bars based on historical
>  data, TradeStation uses the same simulation described in this section.
>  
>  Note: Time-based bars are any bars not based on ticks. For example,
>  1-minute bars, 60-minute bars, daily bars, etc. are all time-based bars.
>  They plot the open, high, low and close price of all transactions that
>  occur within the specified time period. On the other hand, 1-tick bars,
>  10-tick bars and 50-tick bars are all examples of bars that are based on
>  ticks, or transactions, rather than on time. Tick bars (except for 1-tick
>  bars) plot the open, high, low and close price for the specified number of
>  transactions; 1-tick bars plot the price of a single transaction.
>  
>  The information in the next two headings can help you understand how
>  TradeStation handles the simulation of market activity on time-based bars.
>  The information in the first heading provides a frame of reference by
>  describing how TradeStation handles the entry and exit orders of a trading
>  system applied to time-based bars based on real-time/delayed data.
>  
>  The information in the second section describes the different way
>  TradeStation handles the entry and exit orders of a trading system applied
>  to time-based bars based on historical data (either intra-day data pasted
>  into the Omega Server or daily data in a supported format).
>  Understanding How TradeStation Handles Entry and Exit Orders on Time-Based
>  Bars Built with Real-Time/Delayed Data
>  
>  Every trading system should be designed with two signals: a signal that
>  specifies the conditions in which you want to enter the market, and a
>  signal that specifies the conditions in which you want to exit the market.
>  Generally speaking, a part of each signal is the price level at which you
>  want to enter or exit the market.
>  
>  When you are working with time-based bars based on real-time/delayed data,
>  TradeStation receives price data tick-by-tick (transaction by transaction)
>  and builds time-based bars from that tick-by-tick data. As each transaction
>  is received, TradeStation calculates whether or not the entry or exit
>  criteria of an applied trading system is triggered by that transaction. If
>  a transaction is received that matches the entry criteria of the system,
>  TradeStation issues the entry signal at the exact moment the transaction is
>  received. If a transaction is received that matches the exit criteria of
>  the system, TradeStation issues the exit signal at the exact moment that
>  transaction is received.
>  
>  Therefore, it is possible to both enter and exit the market on the same
>  time-based bar in the event that, within the same time-based bar, a
>  transaction triggers the entry criteria of your system first, then within
>  the same time-based bar a transaction triggers the exit criteria of your
>  system. TradeStation handles both signals in the order in which the
>  transactions are received on a real-time/delayed basis.
>  
>  If the exit signal of a trading system is triggered first in a time-based
>  bar in which both the entry and exit criteria of a system are met,
>  TradeStation handles the exit criteria in the following ways:
>  
>  If you do not have an open position and a transaction triggers the exit
>  criteria of your system first and then a later transaction triggers the
>  entry criteria, TradeStation ignores the exit criteria (because at the time
>  there is no open position to exit) but issues the entry signal to open a
>  position.
>  
>  If you do have an open position and on the same time-based bar a
>  transaction triggers the exit criteria of your system and then a
>  transaction triggers the entry criteria of your system, TradeStation shows
>  the open position as having been liquidated due to the exit criteria, then
>  would show a new open position based on the entry signal.
>  
>  As you can see, when you apply a trading system to a time-based chart based
>  on real-time delayed data, TradeStation can calculate the entry and exit
>  criteria of your trading system with great precision and enter and exit the
>  market based on exactly what is happening in the market when one or more of
>  the criteria of your system are met.
>  
>  Understanding How TradeStation Handles Entry and Exit Orders on Time-Based
>  Bars Built with Historical Data
>  
>  The information in the previous heading provided a frame of reference for
>  you by covering the way TradeStation handles the entry and exit signals
>  generated by a trading system when applied to a time-based chart based on
>  real-time/delayed data.
>  
>  Before you can understand the way TradeStation simulates market activity
>  when you apply a trading system to a chart of time-based bars based on
>  historical data, you need to understand why it is necessary for
>  TradeStation to simulate market activity when you apply a trading system to
>  a chart for time-based bars based on historical data.
>  
>  When you work with time-based bars based on historical data, TradeStation
>  cannot know the chronological order of the transactions that make up the
>  bar. The only transactions we can be sure of with time-based bars based on
>  historical data are the open, which occurred first, and the close, which
>  occurred last. With time-based bars based on historical data there is no
>  way to be sure whether the market opened and then went down, or the market
>  opened and then went up.
>  
>  However, because of the importance of the order of the ticks when you have
>  applied a trading system to time-based bars based on historical data, Omega
>  Research spent a great deal of time studying the movement of various
>  markets to discover a way to determine the most likely chronological order
>  of the high and low ticks.
>  
>  After extensive research, a general rule was established about the
>  chronological order in which ticks occur. Under this rule, if the open of
>  the bar is closer to the low of the bar than to the high of the bar,
>  TradeStation handles the bar as if the low was reached first and then the
>  price went to the high before moving to the close. If the open price of the
>  bar is closer to the high of the bar, then TradeStation handles the bar as
>  if the high was reached first, and the price went to the low before moving
>  to the close.
>  
>  The order of the transactions that make up the bar becomes very important
>  when you apply a trading system to time-based bars based on historical
>  data. For example, if you had no market position and the entry and exit
>  criteria of the trading system were both triggered on the same bar, which
>  signal was triggered first is a very important issue.
>  
>  If the exit criteria of the system were triggered first, TradeStation would
>  ignore the exit signal (because there was no market position to exit) and,
>  when the entry signal was triggered on the same bar, TradeStation would
>  issue the entry order, showing you as having opened a new position.
>  
>  
>  
>  Order in which transactions are assumed to have been made
>  
>  The bars in the above figure show the order in which TradeStation would
>  assume transactions had occurred. In the above figure, transactions are
>  marked 1, 2, 3 and 4. The open price of a bar is always number 1. The close
>  price of the bar is always number 4. The numbers 3 and 4 are used to
>  designate the most likely chronological order of the high and low ticks.
>  
>  Rarely does the market strictly follow the 1, 2, 3, 4, order illustrated in
>  the previous figure. Instead, the market bounces up and down. For example,
>  even on a day when the market climbs in a relatively steady manner, there
>  are brief dips followed by still higher highs.
>  
>  When you apply a trading system to a chart based on historical data, a
>  special TradeStation innovation called Bouncing Ticks was created to
>  simulate the irregular up and down way the market really moves, even during
>  an up-trend or a down-trend.
>  
>  The way the Bouncing Ticks function works is simple enough to understand:
>  When market conditions trigger the entry signal of your trading system
>  (either long or short), TradeStation bounces back by a particular
>  percentage that you can specify. If, within that percentage, there is a
>  price that would trigger the exit criteria of your system, TradeStation
>  exits the position on the same bar on which you entered the position.
>  
>  Here is the major reason that TradeStation simulates market activity in
>  this way: During actual market activity, chances are extremely high that
>  once the entry signal of your trading system is triggered the market would
>  turn against you by a certain percentage. When testing a trading system on
>  historical data, you need to take this normal bouncing market activity into
>  account, particularly when you design your system's exit criteria. For
>  example, in real-time market conditions, when the market turns against you,
>  you have no way of knowing if the market will rebound in your direction.
>  Your system should have been constructed in such a way that it exits your
>  position before you sustain losses that you cannot afford.
>  
>  When testing a trading system on a time-based chart based on historical
>  data, it can signal a flaw in your trading system if the system repeatedly
>  enters and exits on the same bar. In such a case, we recommend that you
>  re-examine the rules of your system and redesign the entry and exit
>  criteria so that the exit criteria of the system liquidates your open
>  position only when the market takes a significant turn against you.
>  
>  Setting the Bouncing Ticks Option
>  
>  As detailed in the previous heading, TradeStation uses an exclusive feature
>  called Bouncing TicksTM to simulate actual market activity when you apply a
>  trading system to time-based bars based on historical data. The percentage
>  that TradeStation bounces back in order to simulate market activity is, by
>  default, 10 percent of the total price range of the bar. For example, if
>  the high of the bar were 100 and the low were 90, TradeStation would bounce
>  back one point whenever the entry signal of a trading system was triggered.
>  
>  The following provides directions for changing the default percentage that
>  TradeStation bounces back when the entry criteria of a trading system are
>  triggered when you apply a trading system to time-based bars based on
>  historical data.
>  
>  1. Use the Tools - Options menu sequence to open the Options dialog.
>  2. Click the System tab to produce the System dialog.
>  3. In the Percent increment for Bouncing Ticks edit box, delete the
>     current value (by default, 10 percent) and enter a new value.
>  4. Click OK to return to TradeStation.
>  
>  Omega Research decided on the default of 10 percent after extensive
>  research into how the markets move during the trading day. We recommend
>  that you not change the default unless you are testing the system to
>  determine how it performs in what might be considered non-typical market
>  conditions.
>  
>  See Also:
>  
>  Understanding Trading System Signals in a Chart
>  Using the System Report to View System Results
>  Using the System Equity Indicator During Testing
>  Specifying Trading System Input Values
>  Adjusting Trading System Profit-Loss Results for Costs
>  Using Stops to Limit Your Potential Losses
>  Setting Entry Limits on Trading Systems
>  Understanding Trading System Order Types
>  Specifying Trailing Stops
>  Deleting and Turning-Off Systems
>  
>  Formatting Trading System Colors and Style
>  
>  Other relevant chapters are:
>  
>  Chapter 13, Getting to Know Trading Systems
>  
>  Chapter 15, Optimizing Your Trading Systems
>  Chapter 16, Automating Your Trading Systems
>  
>  http://www.markbrown.com
>  
>