Daily Commentary - Posted on Wednesday, November 4, 2009, 11:37 PM GMT +1

4 Comments


Nov Wednesday 4

TRADING THE ODDS on Thursday – November 5, 2009

Wednesday’s FOMC announcement session again perfectly complied to historical probabilities and odds calling for some extensive strength between yesterday’s close and the start of Wednesday’s last hour of the session.

The ES E-MINI S&P 500 gaped up +0.89% on the open, was trading +1.32% above Tuesday’s close at the end of the first hour of the session and +1.34% above Tuesday’s close at the start of the last hour of the session.

2009-11-04-indices

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The following setups (among others) were triggered on Wednesday’s close:

No. INDEX SETUPS TRIGGERED
1 E-MINI S&P 500 closed higher at least +0.50% on an FOMC announcement session
2 E-MINI S&P 500 closed higher three sessions in a row
3 E-MINI S&P 500 closed higher three sessions in a row, the third session being an FOMC announcement session
4 E-MINI S&P 500 opened up at least +0.25% above the previous session’s high on an FOMC announcement session
5 E-MINI S&P 500 opened up at least +0.50% above the previous session’s high, but closed in the lower half of the daily trading range (strength on the open, weakness on the close)

* ) : –

( * the setup doesn’t provide a statistically significant edge on any side of the market)

Table I shows the ES E-MINI S&P 500 performance on the close (since 01/01/1990) on the next session (in this event Thursday, November 5) immediately following those sessions where setups S1 to S5 listed above had been triggered in the past.

2009-11-04-indices

All setups are agreeing concerning their negative outlook on the then following session, showing an above-average probability and significantly above-average profitability (average loss) for a lower close (over the course of) the next session(s). Not one of those setups shows an average (!) gain over the course of the then following five sessions. With setup S4 triggered on close of the previous session (unfortunately 7 occurrences only), the ES E-MINI S&P 500 closed lower the next session on 6 out of 7 occurrences.

Table II below shows the ES E-MINI S&P 500’s intraday performance (since 01/06/2001) concerning the open, the intraday low, the end of the first hour of the session in comparison to the previous session’s close, the start of the last hour in comparison to the previous session’s close, and the close on those sessions where setup S5 had been triggered on close of the previous session.

2009-11-04-ESS5

It is interesting to note that – since 01/06/2001 and with respect to the then following session (in this event on Thursday, November 5) – the ES E-MINI S&P 500

  • opened lower on 26 out of 38 occurrences,
  • left an unfilled opening gap up on only one out of 38 occurrences,
  • was trading higher (in comparison to the previous session’s close) at least +0.50% at the end of the first hour on only three out of 38 occurrences,
  • managed a gain on the close of +0.75% or more on only three out of 38 occurrences, while losing -1.0% or more on 9 occurrences.

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Bottom line:

At least based on historical probabilities and odds and the market’s regular recent performance on the session after those setups listed above had been triggered on close of the previous trading day, the outlook concerning the ES E-MINI S&P 500′ performance on the open and the first hour of Thursday’s session is at least slightly negative, which will probably apply to Thursday’s close as well .

A favorable short-term opportunity on the short side (if not already positioned likewise) would be provided in the event of any pre-opening strength and/or a higher open targeting some weakness during the first part of Thursday’s session.

Successful trading,
Frank

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Summary of potentially tradable edges for Monday – November 2, 2009

DATE TIME WHAT ACTION WHY ENTRY
STOP 1)
Pos. Size 2) 3)
11/04/2009 n.a. E-MINI S&P 500 SHORT see setup S5 above

1) the STOP may represent a buy or a sell stop ; on a long position a STOP above the ENTRY will represent a limit order (profit target achieved), a STOP below the ENTRY a stop loss order ; the inverse applies to a short position respectively
xx
2) For position sizing, optimal f (by Ralph Vince) is utilized;

optimal f = ([( win/loss ratio + 1 ) * probability of a winning trade ] – 1 ) / ( win/loss ratio ) ;
win/loss ratio = avg. gain on a winning trade / avg. loss on a losing trade ; /% simplified version ;
Pos. Size (in $) = MAX [Intraday / Overnight Initial Margin ; Maximum Losing Trade (in $) / optimal f ] ;

Margin requirements:
ES E-MINI S&P 500 (ES): Intraday Initial Margin = $2,250 ; Overnight Initial Margin = $5,625 ;
ES E-MINI Nasdaq 100 (NQ): Intraday Initial Margin = $1,750 ; Overnight Initial Margin = $3,500 ;
Russel 2000 Mini Futures (TF): Intraday Initial Margin = $2,500 ; Overnight Initial Margin = $5,000)
xx

3) Position size in units per $xxx of marginable equity; if the E-MINI S&P 500, the E-MINI NASDAQ 100 or Russel 2000 Mini Futures are utilized, the number in brackets equates to the number of contracts, otherwise to the number of leveraged Exchange-Traded Funds (ETFs) of 300% of the (inverse) performance of the underlying index, assumed a fixed marginable equity of $100,000

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Disclaimer: No positions in the securities mentioned in this post at time of writing.

The information on this site is provided for statistical and informational purposes only. Nothing herein should be interpreted or regarded as personalized investment advice or to state or imply that past results are an indication of future performance. The author of this website is not a licensed financial advisor and will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on the content of this website(s). Under no circumstances does this information represent an advice or recommendation to buy, sell or hold any security.

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Comments (4)

 

  1. be the ball says:

    I apologize if you have already answered this in previous comments….

    You tweeted a short at the close of the futures today in the ES. Your disclaimer shows no position in the ES.

    Are your tweets during the day strictly for the hypothetical TTO portfolio and are not necessarily a real position?

    Thanks for clarifying

  2. Predator says:

    Hi Frank,

    Regarding your intraday performance table, there is a reasonable difference between (winning trades at open) vs. (winning trades first hour/prev close). Could we say that negative bias ends at the first hour of the session?

    • Predator,

      no, the negative bias doesn’t end at the end of the first out, it still exists into the close (18 higher and 20 lower closes, profit factor 0.49 only which means you’d lose 1 dollar for every 49cent gained).

      Probabilites and odds are slightly improving over the course of the session, worst at the open and (relatively) best at the close, but betting on a higher close would’ve always been an unfavorable wager.

      For betting on the long side, a profit factor above 1 is mandatory and statistically significance (t-score above/below +/-1.645) required.

      Best,
      Frank

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