TRADING THE ODDS » Odds

TRADING THE ODDS on Tuesday, March 30

admin — Tue, 30 Mar 2010 11:40:45 +0000

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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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.

Setups, Probabilities and Odds

admin — Sun, 28 Mar 2010 20:05:02 +0000

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).

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

________________________________

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

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

admin — Sun, 21 Mar 2010 16:22:08 +0000

Although the efficient-market hypothesis claims that prices of financial assets always exhibit random walk behavior and thus can not be predicted with consistency, history shows that there are a couple of favorable setups based on daily open|high|low|close prices of an asset which stood the test of time and may be part of a potential market timing strategy.

Part I today deals with those setups (based on price alone) which – from a longer-term and more recent history – showed a favorable opportunity on the long side of the market, while part II will deal with those setups which historically showed a favorable opportunity on the short side of the market. Part III at a later stage will take a deeper dive into favorable combinations of setups on the long and short side of the market (e.g. x consecutive sessions where the SPY posted a higher high and a lower low on the same session), and part IV will deal with favorable opportunities on the long and short side of the market over the course of the then following x sessions (e.g. probability and profitability for at least one higher/lower close over the course of the then following 1 – 3 sessions after a respective signal had been triggered in the past).

Table I below shows the SPY‘s historical (since 01/01/1990) performance (number of occurrences, % of winning trades, median return, cumulative return) 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 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 and II below itemizes only those occurrences and setups where the probability of a winning trade historically exceeds 66.67%. A positive streak indicates a respective number of consecutive sessions with a positive return / higher close /close above … and vice versa.

How to read the stats:
(e.g. the fourth line): since 1990 there were 17 occurrences (# Occurr.) where the SPY opened below (Streak = -5) the previous session’s close (Setup 2) on 5 consecutive sessions (‘Streak‘). The SPY closed higher on the then following session on 70.59% (= 10 sessions) of all occurrences, showed a respective profit factor of 6.47, a median return of +0.3956% and cumulative returns of 25.73%. A streak of ’0′ means ‘unchanged’ (e.g. the SPY did not open above/below the previous session’s close, but opened unchanged).

Table I
(01/01/1990 – today)

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

It’s not always buying weakness which shows the highest probability and/or profitability for a higher close on the then following session, but buying strength as well; 15 out of those 44 favorable opportunities on the long side were triggered after a long streak of positive returns (e.g. going long after a streak of 9 consecutive sessions where the SPY opened above the previous session’s close),
long-term, setup 10 (an unfilled gap down) and 12 (an unfilled gap up) did never provide a favorable (from a probabilties perspective) opportunity on the long side, even after a streak of x consecutive sessions with an unfilled gap up/down.

Due to the fact that the market(s) showed a different behaviour during the 90th (trend-following was the dominant theme) and 20th (short-term mean reversion was/is the dominant theme), Table II below now shows the SPY‘s historical (since 01/01/2000) performance (number of occurrences, % of winning trades, median return, cumulative return) 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 (bandwith checked for: -25 … +25) of consecutive sessions (‘Streak‘) in the more recent past, assumed one would’ve bought the SPY on close of a session where the respective setup had been triggered:

Table II
(01/01/2000 – today)

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

especially three consecutive closes below the previous session’s low (setup 18) provided a favorable entry on the long side of the market (with respect to the raw number of occurrences, the respective probability for a higher close on the then following session, the profit factor and median trade), likewise during the 90th and 20th,
2 consecutive sessions with an open above the previous session’s high (setup 7) are a more recent (bullish) appearance; this setup didn’t make it in the long-term list (Table I, since 1990), but showed one of the more favorable opportunities on the long side since 2000,
setup 11 where the SPY posted a series of 5 consecutive sessions with a low below the previous session’s low is one of the most favorable setups. It shows a relatively high number of occurrences (35 since 2000), a winning percentage in excess of 70%, and most interesting a median return on the then following session of almost +1.0%. Next to setup 11 is setup 23 where the SPY posted a series of 5 consecutive sessions trading below the previous session’s close going into the last hour of the session, closing higher the next session on every 3 out of 4 sessions with a median return in excess of 1.0%, and finally
it’s not always buying weakness which shows the highest probability and/or profitability for a higher close on the then following session, but buying strength as well; more than 50% (29) out of those 57 favorable opportunities on the long side were triggered after a long streak of positive (the so-called ‘overbought‘ conditions) instead of negative returns (e.g. going long after a streak of 2 consecutive sessions where the SPY opened above the previous session’s high).

Successful trading,
Frank

________________________________

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

Level of Bullishness

admin — Mon, 15 Mar 2010 13:14:04 +0000

With Friday’s session, the market showed a level of bullishness rarely observed over the course of the last 20 years:

The SPY (S&P 500 SPDR ETF) closed higher on the 11th consecutive session (now 4 occurrences since 01/01/1990),
The SPY hasn’t posted two consecutive lower closes for 25 sessions now (25 occurrences since 01/01/1990), and
The SPY hasn’t posted two consecutive lower lows for 25 sessions now (25 occurrences since 01/01/1990).

Table I below shows the SPY‘s historical performance (since 01/01/1990) over the course of the then following 1, 2, 3, 5 and 10 sessions assumed one would’ve bought the SPY on the close of a session when the SPY hasn’t posted two consecutive lower closes over a period of at least 25 sessions in the past:

Historically there were only seven clusters of sessions (March 2005, January 2004, September 2003, December 1995, March 1995, January 1995, September 1993) which showed a comparable level of bullishness.

With Distribution of Returns (represents where the setup’s median return is ranked in comparison to the – ranked in descending order – median at-any-time return) at or around the 40% mark, none of those occurrences being part of the top 10% best and worst performing at-any-time sessions (except ten sessions later), and the SPY never closing higher greater than +1.54% five and +1.52% ten sessions later, upside potential will probably be limited, so a sideways trading, rangebound marked with an downside bias seems to be he most likely outcome.

This fits into the conclusions drawn from the recent streak of high RSI(2) readings (see last Thursday’s posting Implications of High RSI(2) Readings). The market showed the expected short-term (limited) upside bias and – up to now – refused to go down on Thursday’s and Friday’s session despite heavily overbought momentum indicator readings.

Successful trading,
Frank

________________________________

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

Implications of High RSI(2) Readings

admin — Thu, 11 Mar 2010 08:22:49 +0000

On Wednesday’s session, and with respect to the SPY (SPDR S&P 500 ETF), Wilder’s Relative Strength Index (RSI) for a 2-day period closed above 95 the sixth day in a row, and above 99 on the fourth consecutive session.

With respect to the latter, the last occurrence dates back 15 years (see stats below), which – at least with respect to historical probabilities and odds – might have positive implications looking out 10 sessions ahead.

Table I below shows the SPY‘s historical performance (since 01/01/1990) over the course of the then following 1, 2, 4, 5 and 10 sessions assumed one would’ve bought the SPY on the close of a session when the RSI(2) closed above 99 on the fourth consecutive session.

Interesting to note that historical probabilities favor a continuation of the uptrend over the course of the then following 10 sessions. After four consecutive RSI(2) readings above 99 (on the close), the SPY closed higher 5 sessions later on 12 out of 14 occurrences, and was never trading (intraday, not only on the close) lower than -1.46% below the trigger day’s close over the course of the then following 5 sessions, so historically downside potential was more or less not existent. In addition, the SPY was trading higher 10 sessions later on 11 out of those 14 occurrences, and did never close lower greater than -0.29% below the trigger day’s close.

And on a session immediately following a fourth reading above 99 (in this event on Thursday, March 11), the SPY never lost more than -0.33% on the close, although one should be carefull to read anything statistically relevant into something with 14 occurrences only over the course of 20 years .

But with Distribution of Returns (represents where the setup’s median return is ranked in comparison to the – ranked in descending order – median at-any-time return) only slightly above/below the 50% mark, none of those occurrences being part of the top 10% best and worst performing at-any-time sessions, and the SPY closing higher greater than +1.0% five sessions later on only one out of those 14 occurrences, upside potential will probably be limited as well, so a sideways trading, rangebound marked with an upside bias seems tto be he most likely outcome.

Almost the same conclusion can be drawn with respect to historical occurrences where the RSI(2) closed above 95 on six consecutive sessions. Table II below shows the SPY‘s historical performance (since 01/01/1990) over the course of the then following 1, 2, 4, 5 and 10 sessions assumed one would’ve bought the SPY on the close of a session where the RSI(2) closed above 95 on the sixth consecutive session.

Historically on a session immediately following a sixth reading above 95 (in this event on Thursday, March 11), the SPY never lost more than -0.47% on the close (24 occurrences), and did never close lower than -0.43% below the trigger day’s close 4 sessions later. And out of those 24 occurrences, the SPY has always posted at least one higher high than the trigger day’s intraday high over the course of the then following 10 sessions.

Successful trading,
Frank

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