Daily Commentary - Posted on Tuesday, March 30, 2010, 1:40 PM GMT +1

8 Comments


Mar Tuesday 30

TRADING THE ODDS on Tuesday, March 30

For the session on Monday, March 29 I published a Market Snapshot ( see Setups, Probabilities and Odds ) showing a list of potential setups based on the SPY‘s current open|high|low|close|first hour|last hour quotes and the then current number of consecutive sessions for which the SPY had posted a higher (+) / lower (-) quote / daily return as well (e.g. the number of consecutive sessions with a higher open, a higher close, a higher high or lower low, and and and).

With respect to Monday’s session, the market’s history and respective probabilites and odds based on those occurrences where the SPY had triggered the same combination of setups and streaks in the past, indicated an overall positive bias (confirmed by the market).

Table I below now shows the list of setups triggered on close of Monday, March 29, and the current number of consecutive sessions with a higher (+) / lower (-) price / daily return as well.

How to read Table I:

On Monday, March 29, the SPY
Index 2: opened higher (above the previous session’s close) on the third (+3) consecutive session,

Index 13: closed above the open on the first (+3) consecutive session (after posting three consecutive closes below the open before),

Index 30: the intraday range contracted for the third consecutive session (-3), and
Index 31: closed above the midpoint of the session on the first (+1) consecutive session (after closing below the midpoint on two ocnsecutive sessions before).

I again checked for the respective historical probabilities and odds (since 01/01/1990) whenever the SPY showed an identical combination of any two of those setups listed above, e.g. the probabilites and odds after posting a higher open on three consecutive sessions (Index 2, +3) in combination with a higher close on two consecutive sessions (Index 5, +2).

Table II below shows the SPY‘s historical (since 01/01/1990) performance (number of occurrences, the combination of setups and streaks, percentage 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 the respective combination of setups and streaks had been triggered in the past (Table II itemizes only those setups where the probability of a winning trade exceeds 66.67% or undercuts 33.34%, and the sample size (number of occurrences) is greater than or equals at least five ):

It is at least interesting to note that with respect to those setups being triggered on close of Monday, March 29 for the market’s probabilities and odds on Tuesday, March 30,

  • the raw number of positive setups (37) is way in excess of the raw number of negative setups (7) being triggered,
  • with respect to the combination of three consecutive sessions with a higher open  – 2 (3) – in combination with two consecutive higher closes – 5 (2) – (see the very first line of Table II), probabilities and odds are heavily skewed in favor of another higher close on Tuesday’s session: out of 43 historical occurrences, the SPY closed higher on the then following session on almost three out of every four occurrences (72.09%), with a profit factor of 6.17 and a maximum loss of -0.84%,
  • but: since 01/01/1990 there have been 5 (too small to read anything statistically significant into it) occurrences where the SPY closed above the previous session’s open on six consecutive sessions  – 18 (6) – in combination with a contraction in the daily trading range on the most recent three consecutive sessions – 30 (-3) -, and so far the SPY already closed lower on the then following session (the fourth line from the bottom of Table II).

Unfortunately up to now it takes approximately 20 minutes to produce the respective stats, and if the SPY makes a new high/low shortly before the close of and/or it’s not quite clear if the SPY will close higher or lower on the respective session the job can’t be done before the close, so unfortunately every now and then it might be too late to take action based on those stats alone. But I’m already thinking about some optimization/refinement/tuning …

to be continued …

Successful trading,
Frank

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Comments (8)

 

  1. kyle says:

    Frank

    This is really interesting work — thanks for sharing. In terms of that timing problem, perhaps you could look at intra day setups — as in when all the closing stats from the day before are X and when the opening is X then the market is likely to finish Y. I realize we don’t always have a lot of volatility intraday and this likely complicates the model but it is one way of getting around not having the time before the night before’s close.

  2. CarlosR says:

    Frank, I don’t trade the SPY, but doesn’t that trade after hours? I seem to remember that it does, which would lessen the pressure to have the trade in by the close. Of course, trade execution would often be better if the result could be available before the close of reg trading hours…

    • admin says:

      CarlosR,

      you’re absolutely correct, and I already pointed to the fact on my ‘STRATEGY PERFORMNCE’ page. But it would be preferable to be able to act accordingly already before the close and not at 4:15 pm at the earliest. I’m still working on a solution, please stay tuned …

      Best,
      Frank

  3. Peo says:

    Frank,

    Are you really sure that this is a way to go and have you statistics telling that you could get a tradeable signal with this model? I have made something similar, but without great success.

    Kindly,

    Peo

    • admin says:

      Peo,

      there is nothing lika the holy grail of trading, but why shouldn’t it be possible to compute a tradable signal out of this approach ? If you don’t try to develop something further, someone else will (for sure).

      Please stay tuned, it may take a while, and I’ll be on vacation for a couple of days.

      Best,
      Frank

      • Peo says:

        Frank,

        I fully agree with you. The only thing is that you probably have to do it a bit more complicated to get a good signal. I believe that it might be needed to look at the correlations between the pairs or something similar to get rid of some noice. My question was mostly if you have made quantitative tests of how it works.

        Kindly,

        Peo

  4. Hey Frank, just curious: What software are you using for your backtesting? Is it something provided by Metastock, or does Metastock just provide the data as you mention? Thanks for all your insights, great work!

    • admin says:

      Panos,

      thanks a lot for your kind words.

      I use Matlab form MathWorks. Matlab is not especially designed for the stock market, but provides a lot of predefined modules for financial and statistical projects. I did all the programming (scripts, stats, …) myself.

      Best,
      Frank

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