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.

6 Highs plus 6 Lows = ?

(Due to the fact that this blog is -naturally after going live a week ago- in the early stages, I’d be happy to get and discuss your suggestions concerning the presentation of figures and/or potential setups you’d like to get looked into -among others-; my email is tradingtheodds@fastmail.fm)

6 Highs plus 6 Lows = ?

After the S&P 500 posted ‘6 Highs‘ on Thursday – March 26, 2009 and 6 Lows on Friday – March 27, 2009, (see my respective posts) I thought it might be interesting to not only explore and present both setups in direct comparison to each other concerning the S&P 500′ performance on the respectively following session, but to explore as well what market history might tell us about those occurrences when a session with ‘6 Highs‘ was immediately followed by a session with 6 Lows‘, utilizing the strategy tables that I presented in my last post (raw number of occurrences and their respective outcome, Table I, and ‘market heat/scorecard’ percentage wise as Table II, see my posting Trading the Odds on Monday – March 30, 2009).

Table I below shows the raw historical number of occurrences (since 01/02/2000) of a higher and lower open,  the average change between close and open (close -open), the average  daily True Range (Wilder True Range), the number of higher highs and lower lows (than the last session’s high/low) after a higher/lower open, the number of occurrences of the then following  higher or lower close as well as the respective sum of all profits and losses going long/short on open, differentiated between

  • 1st column: at-any-time probabilities and odds (taking into account every single trading day),
  • 2nd column: probabilities and odds for the following session after the S&P 500 posted ‘6 Highs‘ (‘w/Survey I‘),
  • 3rd column: probabilities and odds for the following session after the S&P 500 posted 6 lows (‘w/Survey II‘),
  • 4th column: probabilities and odds for the following session (session 3) after the S&P 500 posted ‘6 Highs‘ on day 1 followed by 6 lows on day 2 (‘w/Survey I+II‘).

Table I

survey-20090327-7

(click on image to enlarge)

The second one (Table II) shows -percentage wise solely based on the figures of Table I- the historical probabilities (since 01/03/2000) for a higher and lower open,  the average change between close and open (close -open), the average  daily True Range (Wilder True Range), the historical probabilities for a higher high and lower low (than the last session’s high/low) and a higher or lower close as well as the respective sum of all profits and losses going long/short on open, differentiated identically. But due to the fact that in the 2nd table probabilities significantly above or significantly below their respective at-any-time probabilities (in this case +/-15.00%, but this percentage is up to everyone’s decision what may be regarded as ’significant above’ or ‘below’) are marked by a green (for a probable bullish outcome) and red (for a probable bearish outcome) background color, one may be able to catch on a glimpse if (any), where (e.g. on the open, for a higher/lower close or intraday strength/weakness) and to what extent (historical probabilities) session 3 possibly provides a tradable edge concerning the setup ‘6 Highs‘ on day 1 followed by ‘6 lows‘ on day 2. This represents a kind of scorecard with respect to the specific market pattern under investigation.

Table II

survey-20090327-8

(click on image to enlarge)

Bottom line:

  1. Concerning w/Survey I (‘6 Highs‘)  the edge would have been on the short side (as posted in Trading the Odds on Friday – March 27, 2009) -but to a lesser extent compared to the time frame since 01/02/2007- due to the S&P 500′ tendency to close on average -0.03% below the open even on a higher open, and the significantly below at-any-time profit factor going long on open as well as the significantly above at-any-time profit factor going short on open. The above at-any-time probability that the S&P 500 would probably not post a lower low (33.33%) was ‘violated’ on Friday’s session (just to remind us that we’re always talking about probabilities, not certainties).
  2. Concerning w/Survey II (‘6 Lows the edge would be -in the event the market opens lower- to capitalize on any follow-through of Friday’s weakness due to the S&P 500′ tendency to post a lower low than the previous session’s low, and the significantly above at-any-time profit factor going short on open.
    In the event the market opens higher, the edge would be to capitalize on the S&P 500 statistically above-average profit factor going long on open (but not necessarily directly going long on open due to the above-average chances of some intraday follow-through of Friday’s weakness and the above-average probability of violating Friday’s low -to a significant percentage wise extend-, but playing the positive expectancies on the long side of the market on a higher open only and by timing one’s intraday engagement).
  3. Concerning w/Survey I+II (‘6 Highs‘ followed by 6 Lows) -which went into effect on Friday’s close and applies to Monday’s session- the partly bullish edge gets almost completely lost (except the slightly above at-any-time probability for a higher open on Monday).  Concerning this setup the S&P 500 closes -on average- below the open independently from the direction of the opening quotation, and in the event the markets open lower to a -on average- significantly above-average percentage wise extent. In only 3 out of a total of 21 occurrences did the S&P 500 manage to post a higher high, while it posted a lower low on 14 out of those 21 occurrences. And the profit factor going long on a higher open and short on a lower open is either significantly below average (for the ‘buy side’ on a higher open) or significantly above average (for the ‘short side’ on a lower open) for an overall bearish tendency.

But 21 out of 2,321 sessions for w/Survey I+II (‘6 Highs‘ followed by 6 Lows) is not a sample size which would allow for reading anything into it, and we’re always talking about probabilities (to capitalize on in the long run) , not certainties. Nevertheless something to keep in mind …

The following table shows the market’s behavior on those 21 sessions (day 3) after the S&P 500 posted ‘6 Highs‘ on day 1 followed by 6 lows on day 2 (‘w/Survey I+II‘):

No. Date Open Higher High Lower
Low
Close Close – Open
1 03/06/2009 +0,22% -1,30% -1,64% +0,12% -0,10%
2 01/30/2009 +0,07% -1,98% -2,66% -2,28% -2,34%
3 11/06/2008 -0,04% -4,93% -5,28% -5,03% -4,99%
4 09/02/2008 +0,39% +0,42% -0,82% -0,41% -0,80%
5 06/27/2008 +0,04% -2,04% -0,87% -0,37% -0,41%
6 06/09/2008 +0,01% -2,10% -0,68% +0,08% +0,07%
7 10/31/2007 +0,07% +0,87% -0,01% +1,20% +1,12%
8 07/06/2006 -0,01% -0,02% +0,39% +0,25% +0,26%
9 03/01/2006 +0,08% -0,11% +0,23% +0,83% +0,75%
10 01/23/2006 +0,04% -1,28% +0,06% +0,18% +0,15%
11 09/20/2005 +0,02% -0,04% -0,62% -0,79% -0,81%
12 09/23/2004 +0,00% -1,16% -0,42% -0,47% -0,47%
13 09/21/2004 +0,06% +0,33% +0,22% +0,63% +0,58%
14 04/29/2004 +0,00% -0,82% -1,22% -0,76% -0,76%
15 09/10/2003 -0,52% -1,11% -1,12% -1,20% -0,68%
16 08/04/2003 -0,02% -0,42% -1,23% +0,27% +0,30%
17 03/25/2003 +0,08% -1,24% +0,07% +1,22% +1,14%
18 09/30/2002 -0,19% -3,28% -3,22% -1,46% -1,27%
19 04/12/2002 +0,15% -1,56% +0,03% +0,66% +0,51%
20 10/15/2001 -0,26% -0,49% +0,56% -0,15% +0,11%
21 05/03/2000 -0,14% -1,59% -3,24% -2,16% -2,02%

(‘open’ and ‘close’: percentage change in comparison to the last session’s close; ‘higher high’ and ‘lower low’: percentage change in comparison to the last session’s high and low respectively; close – open speaks for itself: any positive percentage change means a close above the open and vice versa)

Successful trading,

Frank

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Filed under: Daily Update

One Response

  1. eber terandst says:

    Your site is an excellent example of rigurous analysis in a field otherwise densely populated by charlatans. Congratulations ! !
    Only one suggestion, if I may: the tables you present, while very compact, are also very difficult to understand and read. I suggest perhaps another format ?
    Thanks
    eb

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