S&P 500 Tick16By on 2009 Jan 24 Sat 16:21:54
I wrote an article in the Futures magazine some time ago on S&P 500 Tick16 Index and a basic daytrading system that exploit the statistical bias on the index. Here is some supplement information about the concepts.
What is S&P Tick16 Index?
The classic NYSE TICK Index is the summation of a binary function over the last trade of each instrument traded at least once on the day.
The binary function returns 1, named as uptick, for a trade that traded at a price higher than the previous trade, or, if the previous trade is an uptick. The function returns -1, named as downtick, for a trade that traded at a price lower than the previous trade, or, if the previous trade is a downtick.
This index is the key to many successful careers in trading during the 1990s.
It works very well at the time because, the number of trades per each index components is at most 1/10th of what is going on today.
Nowadays, NYSE TICK swings all over the place almost all the time thus making it much less useful.
Tick16 on a traded instrument is a concept to sum up the last 16 up/down ticks of an instrument.
S&P 500 Tick16 index is the sum of TICK16 across all 500 components, updated in real-time.
This index overcomes various weaknesses of NYSE TICK and that you can construct your own basket of symbols to generate the index makes it a very power tool for real-time trading.
Usage in Daytrading
S&P Tick16 Index is a momentum indicator. When used by itself, it is good for timing short term top and bottom when the price (underlying index, e.g. Emini S&P) is moving strongly in one direction while Tick16 index failed to confirm that.
It is also a good tool to confirm change in trend and as a trend quality measurement tool. The trading system presented in Futures magazine utilizes this characteristic as the triggering condition.
What are SP_Tick16_Avg_ST and SP_Tick16_Avg_LT?
By summing up S&P 500 Tick16 index over a longer period of time, certain trend on its behaviour can be identified.
SP_Tick16_Avg_ST uses a shorter time frame to sum up the index while SP_TICK16_Avg_LT uses a longer time frame.
Unlike the real-time S&P 500 Tick16 index, which is essentially a kind of real-time momentum indicator, the ST and LT indicators are trend filters.
Longer Term Bias
When LT is above the neutral zone, most trend following trading models will fail with their short signals. Many people who trade with this kind of filters call it trend buy mode.
When LT is below the neutral zone, most trend following trading models will fail with their long signals. Many call this setup the trend sell mode.
ST indicator can indicate short term overbought and oversold condition when it is far away from LT and started to move back towards LT.
To be able to handle even more hectic market environment, one can construct their own TickN index (e.g. Tick100, Tick200, etc.) in order to capture the real-time momentum of the market easily.
By increasing the number of up/down ticks to summarize, it is possible to overcome most, if not any, market environments to read its real-time momentum quite easily.