TRADING THE ODDS

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

________________________________

If you might want to be instantly notified about what’s happening in the markets and at TRADING THE ODDS, I encourage you to subscribe to my RSS Feed or Email Feed, and (or) follow me on Twitter.

xx

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.

I’m just playing around with / testing a mechanism on how to quantify the next session’s probabilities and odds for a higher / lower close on the then following session not only based on and triggered by a single setup on the previous session’s close, but by a combination of (all of) those setups which – from a historical and statistical perspective – show probabilities and odds significantly above / below the respective at-any-time probabilities for a higher / lower close on the next session, in the first step based on price (open|high|low|close|first hour|last hour)  alone (not taking into account market breadth).

The improvement is that in the past I manually checked for all potential setups triggered on close of a session, and analyzed up to a maximum of 5, but was not able to automatically identify and check for all (combinations) of those setups being triggered on close of a session.

Table I below not only shows the list of setups triggered on close of Friday, March 26, but the current number of consecutive sessions with a higher (+) / lower (-) price / daily return as well.

How to read Table I:

On Friday, March 26, the SPY
Index 2: opened higher (above the previous session’s close) on the second (+2) consecutive session,
…
Index 13: closed below the open on the third (-3) consecutive session,
…
Index 29: was trading below the previous session’s close at the start of the final hour of the session now for a first time (-1),
Index 30: the intraday range contracted for the second consecutive session (-2), and
Index 31: closed belowthe midpoint of the session on the second consecutive session (-2).

I then 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 close a first time (Index 5, +1) in combination with trading below the previous session’s close at the start of the final hour of the session for the first time (Index 29, -1).

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 at least a double-digit number (>= 10)):

It is at least interesting to note that with respect to those setups being triggered on close of Friday, March 26,

• the raw number of positive setups (16) exceeds the raw number of negative setups (8) triggered by a factor of 2,
• the simpliest combination of setups – 5 (1) | 29 (-1) the SPY closed higher for a first time while the SPY was still trading below the previous session’s close at the start of the final hour for a first time as well – is indicating a negative outcome on Monday’s session: 10 higher and 22 lower closes, with a (negative) profit factor of 0.30 and a median return of -0.55%,
• almost all other negative setups triggered are only based on the fact that the SPY hasn’t left an unfilled opening gap down (Index 2: a high above the previous session’s close for 21 sessions) for a month now, while the list of positive setups (showing a higher sample size as well) triggered is widespread, so from a statistical point of view the overall bias for Monday’s session might be positive.

I’m quite sure that running the stats listed above day by day in the future, we’ll get some very interesting outliers, means where historical probabilites and odds either with respect to a single combination of setups (I manually checked for up to 5 potential setups triggered in the past) and/or with respect to the overall sum of combination of setups triggered are heavily skewed in one or the other direction.

The next step will be to incorporate market breadth and check for combinations of price / breadth based setups as well.

to be continued …

Successful trading,
Frank

________________________________

If you might want to be instantly notified about what’s happening in the markets and at TRADING THE ODDS, I encourage you to subscribe to my RSS Feed or Email Feed, and (or) follow me on Twitter.

xx

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.