Studies - Posted on Tuesday, March 23, 2010, 3:22 PM GMT +1

6 Comments


Mar Tuesday 23

O|H|L|C Probability and Profitability (Part II)

This is a follow-up on my previous posting O|H|L|C Probability and Profitability (Part I) looking for historical probabilities and odds with respect to favorable setups on the long side of the market based on daily open|high|low|close prices of the SPY (S&P 500 SPDR).

Part II (I switched the order of precedence) deals with those combinations of streaks of higher/lower intraday and/or end-of-day prices which – from a statistical and historical point of view – represented a favorable setup on the long side of the market targeting a higher close on the then following session (e.g. probability and profitability for higher close on the then following session if the SPY had posted a lower low and a lower close on the same day on three consecutive sessions).

Table I below shows the SPY‘s historical (since 01/01/1990) performance (number of occurrences, % of winning trades, profit factor, median return, geometric growth rate per trade, maximum gain and maximum loss) on the then following session (next day returns) immediately following a session where one of the following setups (‘Setup‘) had been triggered on a number of (bandwith checked for: -25 … +25) consecutive sessions (‘Streak‘) in the past, assumed one would’ve bought the SPY on close of a session where the respective setup (see list below) had been triggered:

Setup 2: today’s open above (+1) / below (-1) below the previous session’s close
Setup 3: intraday high vs. previous session’s close (if negative: unfilled opening gap down)
Setup 4: intraday low vs. previous session’s close (if positive: unfilled opening gap up)
Setup 5: close vs. previous session’s close
Setup 6: open vs. previous session’s open
Setup 7: open vs. previous session’s high
Setup 8: open vs. previous session’s low
Setup 9: intraday high vs. previous session’s high
Setup 10: intraday high vs. previous session’s low (if negative: unfilled gap down)
Setup 11: intraday low vs. previous session’s low
Setup 12: intraday low vs. previous session’s high (if positive: unfilled gap up)
Setup 13: close vs. open
Setup 14: close vs. intraday high
Setup 15: close vs. intraday low
Setup 16: close vs. previous session’s open
Setup 17: close vs. previous session’s high
Setup 18: close vs. previous session’s low
Setup 19: intraday high vs. intraday low (intraday range)
Setup 20: during the first hour (price at 10:30 am vs. 09:30 am)
Setup 21: end of first hour (price at 10:30) vs. previous session’s close
Setup 22: start of last hour vs. end of first hour (price at 3:00 pm vs. 9:30 am)
Setup 23: start of last hour (3:00 pm) vs. previous session’s close
Setup 24: during the last hour (4:00 pm vs. 3:00 pm)
Setup 25: close vs. intraday range

Table I below itemizes only those occurrences and setups where the probability of a winning trade exceeds 66.67%, and the sample size (number of occurrences) is at least a double-digit number (>= 10).

How to read the stats:
(e.g. the first line): since 1990 there were 15 occurrences (Occ.) where the SPY opened above (Streak – in brackets – positive) the previous session’s close (Setup 2) on 4 consecutive sessions (‘Streak‘, in brackets), and closed higher (Setup 5) on the same 4 (‘Streak‘, in brackets) consecutive sessions as well. The SPY closed higher on the then following session on 66.67% (= 10 sessions) of all occurrences, showed a respective profit factor of 1.52, a median return of +0.11%, a geometric growth rate per trade of +0.1090%, a maximum gain of +1.13% and a maximum loss of -0.83% on the then following session.

(e.g. line four): since 1990 there were 18 occurrences (Occ.) where the SPY opened below (Streak– in brackets – negative ) the previous session’s close (Setup 2) on 2 consecutive sessions (‘Streak‘, in brackets), but posted a higher (‘Streak‘ positive, = +2) high (Setup 9) on the same 2 consecutive sessions as well (intraday strength and potential positive divergence). The SPY closed higher on the then following session on 72.22%  of all occurrences, showed a respective profit factor of 1.12, a median return of +0.41%, a geometric growth rate per trade of +0.10532%, a maximum gain of +3.08% and a maximum loss of -4.76% on the then following session.

Especially search for those setups with a high number of occurrences (the so-called ‘opportunity factor‘), a high median return / geometric growth rate per trade, an as low as possible maximum loss and high percentage of winning trade.

Table I
(01/01/1990 – today)

From my perspective, some of the most interesting findings are:

  • it is regularly a streak of higher – not lower – openings in combination with another setup which provided a favorable opportunity on the long side (buying strength on consecutive higher openings), contrary to what one might have assumed,
  • but – expectedly – it’s almost always a streak of intraday lows below the previous session’s close (setup 4) and lower closes (setup 5), which historically provided a favorable opportunity on the long side (going long on oversold conditions),
  • almost the same applies to setup 3 (an intraday high above the previous session’s close): it’s more often a streak of positive intraday highs in combination with another setup which provided a favorable opportunity on the long side (buying strength on consecutive sessions with an intraday high above the previous session’s close), not a streak of unfilled opening gap downs (an intraday high below the previous session’s close).

to be continued …

Successful trading,
Frank

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Disclaimer: No position 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 (6)

 

  1. James says:

    Just curious, what are setups 14 and 15, they are not listed. Keep up the excellent work.

    Thanks,
    James

  2. James says:

    Another question concerning setup on line 3, regarding combo with 2(3) and 8(3). Isn’t the 8(3) setup redundant since any setup with 2(3), higher open above yesterday’s close with automatically be 8(3) also, open higher than previous days low. So isn’t this setup really just a 2(3), three days in a row with open greater than prior session’s close, or am I missing something.

    Thanks,
    James

    • admin says:

      James,

      you’re absolutely correct. It’s not included in my first posting regarding three consecutive higher openings alone due to the fact that I lowered the necessary probability to participate in the list from 66.68% to 66.67% (what a difference it makes).

      Best,
      Frank

  3. Peo says:

    Maybe I did not really understand the setup logic, but to me setup 2 and setup 6 seems like the same thing. Is it maybe that setup 6 should be the missing “open vs. previous session’s open”?

    Kindly,
    Peo

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