Trading the Odds

A statistical approach to profit in the US equity markets, trading the markets like professional card counters are playing Blackjack or expert poker players are playing Poker.

Rollercoaster ride w/the S&P 500

Rollercoaster ride w/the S&P 500

Following the S&P 500 during Wednesday’s session, one may feel like being on a rollercoster ride on a folk festival. The market opened almost unchanged, posted an intraday high +2.54% above yesterday’s close (and a higher high above yesterday’s high as well), only to loose all of it’s gains and some to post a low -1.85% below yesterday’s close (and a lower lower below yesterday’s low as well), to finally close up +0.94% for the day. Wilder’s True Range exceeded 4% today, 4.39% to be exact.

Wilder’s True Range (TR) is defined as the greatest of the following:

  • today’s high less today’s low;
  • the absolute value of today’s high less the previous close;
  • the absolute value of today’s low less the previous close.

In order to evaluate if this pattern may provide an edge for tomorrow’s session (Thursday), I checked for all occurrences since 01/02/2001 when the S&P 500 posted a higher high, a lower low (than the previous session’s high/low) with a True Range of 4%+ (greater than 4%). There were only 10 occurrences, but the sessions following a session which fulfilled the setup mentioned above share something in common:

  1. They ALL posted a (significantly) higher high (would be at least 826.78 for Thursday’s session) ,
  2. They ALL posted a (regularly extraordinary) higher low (the minimum of those 10 occurrences was 3.65% above the previous session’s low), and
  3. The True Range for those sessions regularly exceeded again the then current average True Range (in the majority to a greater extent).

Unfortunately the sample size is very small (and hopefully there is no data issue), so I wouldn’t read too much into these figures, but it is definitely something to keep in mind for Thursday’ session, because in the event tomorrow’s session would queue up with those sessions listed below not breaking ranks, we could expect at least an intraday run up above Wednesday high of 826.78.

# Date Higher High Lower Low Close True Range
1 12/08/2008 +4,45% +7,86% +3,84% +4,85%
2 11/14/2008 +0,42% +6,25% -4,17% +5,16%
3 10/29/2008 +3,13% +9,11% -1,11% +5,07%
4 09/19/2008 +4,46% +7,02% +4,03% +4,86%
5 01/24/2008 +1,20% +5,06% +1,01% +1,56%
6 03/18/2003 +0,48% +3,65% +0,42% +1,11%
7 10/11/2002 +4,56% +4,87% +3,91% +4,90%
8 08/15/2002 +1,42% +4,79% +1,15% +1,64%
9 07/25/2002 +1,13% +5,21% -0,56% +4,47%
10 01/04/2001 +0,18% +4,28% -1,06% +1,57%

(‘Date’ represents the date of the session AFTER the respective session which fulfilled the setup mentioned above, and ‘Higher High‘ and ‘Lower Low‘ represent the percentage change compared to the previous session’s high/low, and a positive prefix concerning the ‘Lower Low‘ means there in fact was no lower low at all, only a ‘higher’ low)

Successful trading
Frank

Advertisements

Filed under: Daily Update, , ,

5 Responses

  1. Renee Ann says:

    Great post. This is my first day to read your blog and I look forward to more. : ) I subscribed to your RSS.

  2. Aesus says:

    First of all, great blog. I am a numbers nerd and love crunching but
    On this data set, the lack of samples, as you mentioned, is troubling. Truly robust samples are well over 100 no?
    Also, 50% of the available data points happened in one year which could point to a shift in how this data set behaves.
    Finally, as the closes were almost evenly split, looks like flipping a coin might be just as predictive?
    Perhaps it might be useful to look at the standard deviation of the changes on the day after the ATR spikes and compare them to the previous 20 days or so? Then, look at the same for the day the ATR spiked and see if there is anything correlative there? Just a thought.
    With such a small data set, I would find the results to be statistically not correlative.

    • Frank says:

      Aesus,

      this setup seems to be typical for bear markets (all occurrences between 2001 and 2003, and in 2008). In order to check its -if any- statistical validity (as already mentioned 10 occurrences is a way too small sample size to read anything into it) I posted a Follow Up …

      Best,
      Frank

  3. moneyfriend says:

    Thanks so much for sharing! Congrats on your new blog!

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Twitter Updates

  • w/ 18.30 at time of writing, the gap between $VIX and $VSTOXX is close to its all time closing low of 19.90, posted on 10/16/2008. 1 year ago
  • The $VIX gained 48.33% over the course of the last week. Since 1/2/1990 there were 38 other occurences w/ $VIX gained > 48% over 5 sessions. 1 year ago
  • On Friday iShares MSCI Brazil Capped ( $EWZ ) closed at 19.09 , a 11+ year low and its lowest level since 11/08/2004. 1 year ago
  • On Friday the Russell 2000 Index ( $RUT ) closed at 1,046.20 , a 2+ year low and its lowest level since 10/09/2013. 1 year ago
  • @QuantStratTradR Sorry, I didn't follow the entire communication. Link to what ? // @easyvolatility 2 years ago

DISCLAIMER

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. Under no circumstances does this information represent an advice or recommendation to buy, sell or hold any security.

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, including the information that others post here.

While every effort will be made to provide complete, the most accurate and current information, none of the information on this site is guaranteed to be correct, and anything written here should be subject to independent verification. I make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to this blog or the information, analysis, statistics, or related graphics contained on the blog for any purpose.

I may or may not hold positions for myself, my family and/or clients in the securities mentioned here. Actions may have been taken before or after information is presented, and any opinions expressed in this site are subject to change without notice.

Please read the full ... DISCLAIMER

Calendar

March 2009
M T W T F S S
    Apr »
 1
2345678
9101112131415
16171819202122
23242526272829
3031  
%d bloggers like this: