Thursday, October 22, 2009 4:48 PM GMT +1
Short-Term Mean-Reversion vs. Trend-Following
Due to some personal matters, the next posting will be on Sunday, October 25.
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Wednesday’s session provided an excellent example why it pays to not only look at the pure number of winning trades vs. losing trades (Winning Trades in %) and/or the Profit Factor (sum of all profits on winning trades divided by the sum of all losses on losing trades), but to take into account the respective ‘state of the market‘ (to cite Michael Stokes on MarketSci), means did they appear in a market environment where mean-reversion was the prevailing theme, or in a trend-following dominated market (the currently prevailing theme).
Table I below shows the ES E-MINI S&P 500′s intraday performance (since 01/01/2000) concerning the open, the (end of the) first hour of the session compared to the previous close, the close, the GLOBEX high (starting at 4:30 PM after the trigger’s day’s close until 4:15 PM on the then following session, in this event from Wednesday 04:30 PM until Thursday 04:15 PM), and the GLOBEX low (in chronological order) on those sessions immediately following a trading day where the ES E-MINI S&P 500 posted a higher high (than the previous session’s high), but closed below the previous session’s low (triggered on yesterday’s close).
Interesting to note that – since 08/19/2008 and with respect to the then following session (in this event Thursday, October 22) – the ES E-MINI S&P 500
- regularly posted a lower open (on 6 out of the last 7 occurrences), and never opened up more than +0.07%,
- was trading below the previous session’s close at the end of the first hour of the session on 6 out of the last 7 occurrences (and on the last 5),
- closed lower again on the last 7 occurrences (on 5 occurrences lower at least -1.0%),
- did not post a pre-opening and intraday high (during the regular session) in excess of +0.47% on the last 7 occurrences (means the ES E-MINI S&P 500 couldn’t manage a gain of more than +0.47% during the next 24 hours after the setup had been triggered),
- was regularly trading significantly lower (on average -1.94% on the last 7 occurrences, but a bit skewed by an outlier of -8.96%) at least once at some time during the next 24 hours (including the pre-opening and regular session).
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In contrast- between 03/23/2005 and 06/25/2008 and with respect to the then following session – the ES E-MINI S&P 500
- regularly posted a higher open (on 18 out of 29 occurrences), and opened lower less than -0.30% only once,
- was trading above the previous session’s close at the end of the first hour of the session on 18 out of 29 occurrences,
- closed higher on 25 out of 29 occurrences (and never posted a loss of -1.0% or less)
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Posting a higher high (than the previous session’s high) but closing below the previous session’s low seems to be – at least with respect to recent occurrences – highly indicative for some follow-through of the previous session’s weakness and limited upside potential on the then following session (despite a strongly up-trending, but trend-following dominated market), while it provided a highly favorable and accurate setup on the long side in a market where short-term mean-reversion is/was the prevailing theme.
On Thursday’s (today’s) session the ES E-MINI S&P 500 at least and up to now complied to the first two and the last bullet point (opening lower, trading lower in comparison to Wednesday’s close at the end of the first hour of today’s session, and trading significantly below Wednesday’s close at least once during today’s GLOBEX session). Let’s see if the market will be able to break the recent streak of 5 lower closes (after the setup had been triggered) today.
Successful trading,
Frank
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Disclaimer: No positions mentioned in this post at time of writing.
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