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.

Trading the Odds on Friday – March 27, 2009


Thursday’s session was remarkable due to the fact that the S&P 500

  • posted a higher open,
  • posted a higher high than the previous session’s high,
  • posted a higher low than the previous session’s low,
  • posted a low above the previous session’s close,
  • posted a higher close,
  • and finally closed above the open.

Unfortunately -for the bulls- 6 ‘highs’ have a statistical tendency to lead -on average- to a close -and regularly percentage wise to a significant extent- below the open on the following session, especially in the event the market opens higher.

Since 01/03/2007, there were 55 occurrences, the last 30 listed at the bottom of the post. In the event the S&P 500 opened higher, it closed -on average- -0.70% below the opening quotation (compared to an -on average- at-any-time gain of +0.51% on a higher open, see ‘w/Survey‘ and ‘at-any-time‘ in the last two columns of the table below), and the (already known, and for statistical purposes only) simple mechanical trading system ‘buy on open in the event the S&P 500 opens higher; sell on open in the event the S&P 500 opens lower; close the trade on market’s close‘ would have yielded a (disastrous) profit factor of 0.25 ($0.25 won for every dollar lost) .

Only 9 out of those 22 sessions with a higher open closed higher as well for a probability of 40%, significantly below the at-any-time probability for a higher close after a higher open of 70%. And in the event you’d like to note that I forgot to mention that in 16 out of those 22 sessions with a higher open the S&P 500 posted a higher high than the previous session’s high as well (way above the respective at-any-time odds for a higher high), that would not have any impact on Friday’s probable outcome because Thursday’s high is only 0.12 index points above it’s close, so any higher open on Friday above Thursday’s close would almost for sure immediately comply with these probabilities.

And even in the event the S&P 500 closed above it’s opening quotation, any upside potential was -concerning this setup- regularly limited (hence the negative expectancy on buying a higher open).

But there are some good news as well: Even in the event the S&P 500 opens lower, only 9 out of those 33 sessions with a lower open posted a lower low than the previous session’s low (814.06 concerning Thursday’s session), significantly below the at-any-time probability of almost 66% for a lower low than the previous session’s low after a lower open.

The table below shows the S&P 500′ historical probabilities and odds (since 03/01/2007) for a higher and lower open, a higher high and lower low (than the last session’s high/low) and a higher or lower close with respect to the respective 2-day RSI (since 01/03/2007), the survey mentioned above and the respective at-any-time probabilities and odds. The current RSI(2) reading of 84.64 and the related probabilities and odds further confirm the bearish case for Friday’s session (with respect to the market’s behavior after the open, not concerning the direction and magnitude of change of it’s opening quotation).


(click on image to enlarge)

The following table shows the market’s behavior on the last 30 sessions following those sessions which fulfilled the setup mentioned on top of the post (to be clear: the sessions listed below are NOT the sessions where the setup occurred, but always the then following session, in this case tomorrow’s session, Friday):

No. Date Open High Low Close Close – Open
1 03/24/2009 -0,28% +0,09% -2,12% -2,02% -1,74%
2 03/11/2009 -0,00% +1,71% -0,80% +0,24% +0,25%
3 03/05/2009 -0,65% -0,65% -4,90% -4,25% -3,63%
4 01/29/2009 -0,59% -0,59% -3,43% -3,31% -2,73%
5 12/31/2008 -0,01% +2,21% -0,11% +1,42% +1,42%
6 12/29/2008 +0,00% +0,10% -1,80% -0,39% -0,39%
7 12/17/2008 -0,55% +0,62% -1,89% -0,96% -0,41%
8 12/09/2008 -0,35% +0,72% -2,67% -2,31% -1,96%
9 11/25/2008 +0,19% +2,01% -1,97% +0,66% +0,47%
10 11/05/2008 -0,39% -0,39% -5,56% -5,27% -4,90%
11 10/21/2008 -0,51% +0,00% -3,34% -3,08% -2,59%
12 10/14/2008 +0,66% +4,08% -3,12% -0,53% -1,18%
13 09/26/2008 -0,39% +0,54% -1,79% +0,32% +0,71%
14 09/22/2008 +0,02% +0,02% -3,94% -3,82% -3,85%
15 09/09/2008 +0,01% +0,07% -3,41% -3,41% -3,43%
16 08/29/2008 -0,32% -0,24% -1,38% -1,37% -1,05%
17 08/06/2008 -0,07% +0,53% -0,69% +0,34% +0,40%
18 07/31/2008 -0,23% +0,05% -1,42% -1,31% -1,09%
19 07/30/2008 +0,11% +1,67% +0,11% +1,67% +1,56%
20 06/26/2008 -0,43% -0,43% -2,94% -2,94% -2,52%
21 06/16/2008 -0,09% +0,34% -0,59% +0,01% +0,09%
22 06/06/2008 -0,28% -0,28% -3,14% -3,09% -2,81%
27 03/25/2008 -0,06% +0,56% -0,64% +0,23% +0,29%
28 03/19/2008 +0,02% +0,81% -2,43% -2,43% -2,45%
29 03/12/2008 +0,04% +0,95% -0,97% -0,90% -0,94%
30 02/14/2008 +0,01% +0,07% -1,46% -1,34% -1,35%

(open, high, low and close are the percentage changes compared to the last session’s close; close – open speaks for itself: any positive percentage change means a close above the open and vice versa)

This will probably be my last posting before Sunday, so enjoy your weekend, and this was a really exciting -and busy to say the least- first week on the blog.

Successful trading

Filed under: Daily Update, , , ,

6 Responses

  1. 4best4worst says:

    Very impressive site…. I referenced and linked it tonight on my blog along with some other timely research….I know it will be helpful to many….

    would appreciate a link from your site to mine on your blog roll if you are willing to do that….



  2. Bill Luby says:

    Great stuff, Frank. I had a hunch you would do an excellent job with this material, but I had no idea just how good it would be.

    In less than a week, you’ve set the bar very high.



  3. dave says:

    Awesome site here frank ! I am a huge quantifiable edges, vix and more , fan . In my oppinion we have to few blogs that focus on quantifying the market. You blog and your content is Grea t! Keep up the good work !


  4. Urszula says:

    Found this blog via 4best4worst. Like what I see. (I trade the ES exclusively.)

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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. 3 years 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. 4 years ago
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  • On Friday the Russell 2000 Index ( $RUT ) closed at 1,046.20 , a 2+ year low and its lowest level since 10/09/2013. 4 years ago
  • @QuantStratTradR Sorry, I didn't follow the entire communication. Link to what ? // @easyvolatility 4 years ago


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March 2009
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