When To Enter And Exit Trades-Using Clear method-by Ron Black

Clear method, a way to determine the direction of short-term rice swings! The method
identifies the direction of the c"rrent rice swing and the recise day the swing
direction changes! #t re$"ires no calc"lation and has no delay! #t is alicable to all
stocks, commodities, and indexes in any time frame!
We saw how, "nlike most technical indicators, the Clear method does not "se the oen
or the close for its analysis! #nstead, it "ses the range of the daily rice bar as the
meas"re of rice "ncertainty! # looked at how rice bars are simlified distrib"tions!
%ince rices are distrib"ted, we consider the rice to be different only if the two
distrib"tions &rice bars' do not o(erla) the bars m"st be *clear+ of one another!
,-.E,E/T -0 T1E 2R#CE BAR
0ig"re 3 shows the Clear method in action, showing the " swings, down swings, and
the *clears+ that define the changes in direction! #n this article, # will look at how the
method defines the only three things rice can do4 mo(e in the direction of the swing,
not mo(e, and re(erse swing direction! When the rice is not mo(ing, there is noise! #
will take a brief look at the noise ercentage as a meas"re of contin"o"s directionality!
0inally, # will look at a way yo" can "se noise to decide when to enter and exit trades!
FIGURE 1: THE CLEAR METHOD. When rice clears below the highest low &15', a new
down swing begins! When rice clears abo(e the lowest high &51', a new " swing
begins!
The Clear Method
This is an entry method I came across in my studies. I first heard of it in an article writen by Ron Black. It's simple
and it works, the most important two things you can find in a trade indicator or method.
It works going short or long on any time frame and it has no delay! I know, right? ounds too good to be true, but it's
not. It's called the clear method because you watch for the bar that clears the bar before the last bar of a swing. The
e!ample I use is of a long trade but it can be used short also.
"e're looking at a down swing in #ord $#% at the end of &une '()(. The two pink hori*ontal lines show the price range
of the bar before the last down bar. In the article they were using the last bar but I tweeked it to gi+e a more definiti+e
signal in my +iew. o, any bars after the bar before the last down bar that has price action inside the two pink
hori*ontal bars ,price action of the bar we want cleared- are noise. "e're looking to get long so we want to enter on
the first bar that clears on the up side. If we were going short we'd look for the first bar to clear to the down side after
a si*eable run to the up side so this is basically a re+ersal indicator. .ou'd want to enter on the first clear bar and no
later than the second clear bar. This is the tricky part because how do you know the first clear bar will clear? "ell I
usually wait until the end of the day and watch like hawk. /round 012(pm )( minutes before the market closes I put
my buy or sell order in according to the direction I'm trading. The chart below shows what happens with the rest of
the mo+e.
/s you can see we got a nice swing higher, as you can also see we got a pull back. .ou could ha+e held on or set up a
short clear trade. .our e!it if your being cautious is the last bar that makes another high and your entry on the short
side would be the first bar that clears the bar before the last up bar. 3ook at chart after chart and you will see these set
ups. I use this method a lot, so I can speak for it's worth.... It works. 3ike any indicator it doesn't work )((4 of the
time, but nothing does. .ou want indicators with the highest possible chance to work. In my e!perience ,ans it's
limited- it works about 524 of the time, you don't get much better than that. 3ook at a few charts and decide for
yourself. If nothing else it's worth a look!
Summary
Tests show that noise occurs about 47% of the time in nearly 600 stocks, and 40% of the
time in 100 exchange traded funds (T!s"# The lower noise in T!s may be due to fre$uent
ga%%ing, forcing %rice bars &clear& of any congestion region and a%%earing to trend more
often#
'tocks and T!s with low noise trend the most, suggesting that they re%resent the best
trading (ehicles for swing traders#
)ust because a stock or T! has low noise does not mean it trends u%ward or downward
consistently# !re$uently, you see tall swings u% and down in straight*line runs#
+ also found the following to be true#
Bull markets tend to be noisier trending up, and bear markets are noisier
trending down.
ETFs trend more than stocks.
Weekly data is noisier than daily data.
Background
,on -lack wrote an article in Technical Analysis of Stocks & Commodities maga.ine,
/ctober 0010 titled, &1sing 2oise#& +n an earlier article ('e%tember 0010, &3etting clear
with short*term swings&" he discussed his &4lear 5ethod& to determine when a short*term
trend changes# +n the /ctober article, he uses the 4lear 5ethod to detect noise#
The Clear Method
The 4lear 5ethod uses the lowest high and highest low to determine when two %rice bars
do not o(erla%# 6hen they no longer o(erla%, they are &clear& of one another, and the trend
changes from u% to down, or down to u%#
+t7s easiest to understand the 4lear 5ethod using an exam%le# The figure abo(e shows %rice
mo(ing lower in a downtrend# +t bottoms in the middle of the left %anel, but what7s key is
the high on that day# That high %rice is below the %rior highs that formed the downtrend# +t7s
the lowest high#
6hen %rice climbs enough so that the low is abo(e the lowest high, then the trend has
changed from down to u%# +n other words, the highest low is abo(e (clears" the lowest high#
+ show that with a green line#
The right %anel is similar only it a%%lies to u% trends# 6hen the lowest high clears the
highest low, the trend is said to change from u% to down# 8gain, the green line shows this#
Enter Noise
The &4lear 5ethod& is used to determine when noise occurs# +f, in an u%trend, %rice
makes higher lows, it is trending u%ward# 6hen it sto%s making higher lows and
before a &clear& trend change occurs, noise takes the %lace of the trend#
+n a downtrend, %rice makes lower highs# 6hen that sto%s ha%%ening and before a trend
change from down to u% occurs, noise sets in#
+n the abo(e figure, the three bars on each %anel with a green line drawn through them are
the noise bars# + show them in magenta#
/n the left %anel, the three magenta bars ha(e highs abo(e the clear bar, but they are not yet
clear of the lowest high, so they are noise# 6hen the highest low ha%%ens, the trend
changes from down to u% and noise ends#
/n the right %anel, the three magenta bars ha(e lower lows than the clear bar, but they are
not clear of the lowest high# They are noise bars# 6hen the lowest high occurs, a new trend
begins and noise ends#
Methodology
+ tested the 4lear 5ethod as if each clear bar was a buy or sell signal following these
guidelines#
Duration: March !, !"" to #ctober , !"", but not all securities
co$ered the entire period. This period showed the %&' ("" inde)
unchanged although two bull and bear markets occurred during the
duration.
*sing ((+ stocks or ,, long only ETFs.
%tocks below -( at the time o. purchase were e)cluded.
/ommissions were -!" round trip 0-" buy and -" sell1.
2n$estment o. -",""" per trade. 'ro3ts or losses were not rein$ested.
Buy or sell at the open the day a.ter price goes clear.
!or the noise test, + used the following#
Duration: March !+, !""" 0Bull market peak1 to December !, !"". 4ot
all stocks and ETFs co$ered the entire range.
*sing ((+ stocks and ,, long only ETFs.
5lmost .6 million lines 0price bars1 used.
Clear Method Results
,on -lack did not claim that his 4lear 5ethod could be used as a stand*alone trading
system# 9owe(er, + tested it anyway# The following table shows the results for the 4lear
5ethod#
Description
Averag
e
Gain/Lo
ss
Average
Ma
Dra!do
!n
Averag
e
Ma
"old
Time
Loss
#in/Lo
ss
Averag
e
"old
Time
S$%
&''
(nde
,, long ETFs,
daily
7".!8 !.68 !.,8 9:8 " 7.:8
((+ stocks, daily 7".8 +.68 +.68 9;8 9 7.,8
((+ stocks,
weekly
.68 ".+8 ".8 +"8 6: 7!.8
,, long ETFs,
weekly
!."8 6.68 6.;8 +68 ;9 7.(8
Short Sales Belo!
((+ stocks,
weekly
7.8 9!8 (( 7.,8
((+ stocks, daily 7".98 9(8 7.68
,, long ETFs,
daily
7".!8 968 , 7.68
,, long ETFs,
weekly
7".8 9"8 +: 7!.!8
2otes:
Average gain/loss# ;er trade a(erage gain or loss, ex%ressed as a %ercentage#
Average max drawdown# 5aximum %eak to trough dro% for each trade, a(eraged o(er all
trades#
Average max hold time loss# 9ow far below the buy %rice the security dro%s during the
trade, a(eraged#
Win/Loss# ,atio of winning trades to all trades, ex%ressed as a %ercentage#
Average hold time# 8(erage trade duration#
S&P 500 index# 9ow the index faired for the duration of each trade, a(eraged o(er all
trades#
The 4lear 5ethod works best on the weekly scale# The win<loss ratio is 46% for T!s and
40% for stocks# Tests on daily data show T!s winning =>% of the time and stocks
winning =7% of the time (long trades only"# 'hort sales win less often, =6% for T!s and
=?% for stocks, both using the daily scale#
The a(erage gain for long only trades is best on the weekly scale: 1#6% %er trade for stocks
and 0#0% for T!s# 2one of the short %ositions (daily or weekly, stocks or T!s" were
%rofitable# The table shows the drawdown and hold time loss exce%t for short sales, which
were not calculated#
)oise Results
The following table shows how often noise occurs in stocks and
T!s#
T!s ha(e less noise than stocks, but that could be due to
excessi(e ga%s that occur in many T!s# ;rice bars that ga% ha(e
a tendency to &clear& sooner than those that do not ga%#
8dditional tests s%litting the duration into bull and bear markets
shows that:
Bull markets tend to be noisier trending up, and bear markets are noisier
trending down<
ETFs trend more than stocks< and
Weekly data is noisier than daily data.
** Thomas -ulkowski
)oise
Stoc
ks
*T+
s
Daily data +;8+"8
Weekly
data
+,8+(8