TRADING THE ODDS

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

________________________________

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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.

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

________________________________

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.