Archive for Trading System
TRIN bearish bias is different from its bullish bias for the same reason that bull market behaviour is different from bear market. Short term overbought condition in TRIN has more requirements than its counterpart.
First, net gain from day trading the TRIN bearish bias.
TRIN is also called the Arms Index. It is often used as a swing term indicator. It can be used that way but it is a waste of the information provided by the index.
First, net gain from day trading this TRIN bias.
Following is a chart showing the net gains from long only models that trade only on a particular weekday. The results are very interesting.
Notice the drastic difference in net gain for each weekday. I can guess that you have many questions in your mind now.
How can this be true?
How come they all look different?
Isn’t the net result supposed to be very similar to the overall net gain?
Here is the net gain chart if you long Emini S&P everyday from open to close in the regular trading session.
Many would have thought that you should have made some money but that is not true. In reality buying the day session is a losing idea all the way since the first introduction of index future until year 2009. Everything changed afterwards.
I have mentioned this issue in Betting On The Gaps Themselves but it was not the emphasis in that article.
Here, I would like to point out three important weekday based characteristics of the Emini S&P market and how they have changed since that Great Spike Low (GSL) in year 2009.
First, Friday was the sell day until GSL. Since then, Friday no longer gives us reliable sell setups. Fridays also become the famous last hour miracle rally day if the week has been down badly.
Second, Wednesday was the continuation day. It was very reliable in giving us continuation play from the move started from Monday / Tuesday. Since 2011, it becomes extremely erratic and has lost this characteristics on close basis.
Third, Tuesday was always the consolidation / down day. It has been like that ever since the large S&P contract was introduced. Yet, since the financial crisis started and went out of control back in 2008, it became the weekday that central banks chose to intervene.
I have no idea why they choose this particular weekday to take actions. All I can gather from news confirming their interventions is that this concentration of intervention activities lands on Tuesdays. At this point, the effect is compounded by POMO larger size programs somehow also concentrated on Tuesdays.
Now, the shocker – the probability statistics on weekdays I compiled in my ebook Time Map 2 is still holding up. The only change is the magnitude of the moves that caused this drastic change. (Sneaky bas#*&ds!)
In another words, the strongest statistical biases now are the intraday ones because interventions are done to trap the traders closest to the market on the wrong side to create the effects the authorities wanted. The resulting powerful moves overwhelm the whole market and can suppress the higher timeframe biases easily. As a result, classic strongholds from higher timeframes no longer produce low risk entries.
So how do we deal with it? The solution is as simple as focusing on one chart pattern, false breakout.
Learn it, use it, and profit from it.
There are quite a number of patterns that work around the weekly STOPD price levels giving us a solid edge. This one is a classic bearish continuation setup.
Net gain chart below.
The bearish property of VIX that no one talks about.
If you need background information about the Volatility Index (VIX) please read The VIX Bullish Play. It has more background information about VIX that I do not want to repeat here. I am going to focus on the bearish trading setup here.
First, the net gain chart from day trading this VIX bearish bias.
The Volatility Index from Chicago Board Option Exchange (VIX) is used to be a great tool for short term timing. It has many excellent properties that are useful for trading. Since the introduction of the VIX Future, however, many of these characteristics has changed. This modified behaviour has led to many famous long term timing methods based on VIX index no longer functional.
In this article I will discuss one of the fundamental property of VIX that has been affected badly and the solution I found that workarounds this change.
First, the net gain from day trading this VIX bias.
Impressive? Read on.
Many people are fixated on the idea of long term "investment" while others would like to explore for better return day trading. Here is an interesting chart with net gains from several trading strategies. You may be surprised by the results.
The results above is summarized in the following table for your convenience.
|Long Only Strategy||Trades||Points||Profit (Loss)|
|Long Open Exit On Close||5274||-283||-14187|
|Long Close Exit Next Open||5274||1335||66770|
|Long Close Exit Next Open On Down Day||2456||1170||58517|
|Long Close Exit Next Open On 2nd Down Day||1107||814||40730|
Several interesting observations from the chart.
First, the results of the strategies:
- The clear winner here is going long when S&P is above its 365 days simple moving average. (I cheated on this one by optimizing the moving average with full benefit of hindsight)
- The clear loser here is the day trading strategy that buys the open everyday and exit on 4 pm close
- The gap strategies perform somewhere in between
- The best performing gap strategy among the 3 basic ones is the one that go long only after 2 consecutive down days. Yes the net gain was lowest among the three strategies but it has the lowest exposure duration in the market while keeping majority of the gain. If commission and slippage is taken into account, it is definitely the winner.
So, I am sorry to say, day traders who bet blindly in regular trading hours really do not stand a chance. Not in the bullish period, and definitely not in the bearish period.
Second, the overall gap to regular session relationship has been changing:
- During the 1990s, gaps account for majority of the gain. Daytraders laughed at long term investors saying that they have a bull market as the daytraders were profiting from the short side most of the time
- During 2000-2003 the Internet bubble burst period, gap play suffers but definitely better than the day time bulls
- During 2003 to 2008, the gaps are the gain. Daytraders continue to laugh at the long term players as they can essentially short into every day session to pocket some profit.
- During 2009 to now, the gaps and the regular sessions are contributing about the same amount so far on the total gain. It is a very drastic change for the day session daytraders as it is first time in history that the day session is giving the bulls equal ground.
This transformation of the relationship affected how the index future market functions during each of these periods. I am not sure if this change in behaviour is a function of the 24 hours nature of the market nowadays or if it is something else structural.
Third, trading the gap itself is a valid strategy. I am not talking about trading the gap fill here. I am talking about speculating on the gaps themselves. In another words, making bets on the direction and magnitude of the gaps in overnight is a valid strategy.
Personally I know a few small hedge funds doing this. It is a profitable strategy with several restrictions like limited size capacity and potential slippage issues. It is a very sexy idea because it is trading strategy at its finest – you simply execute your trade and have your position monitored automatically. Next morning, no matter what, it is done and you get to do other things.
I have been asked many times to write about gap trading techniques as I do gap fill plays so often during trading hours. But you cannot trade the gap fill plays until you understand the gaps themselves. Hence this first introduction showing you that the gaps are heavily bullish biased and that they were the main bullish driver of the market until 2009.
This trading setup is kind of complement pattern of the one presented in The One Bullish Setup Everyone Must Know Daytrading Emini S&P. It is short only, strictly day trade from open to close. It has been profitable all these years. Yet no one ever talks about it.
Here is the dollar gain chart based on the setup.
As promised to my premium members I would publish my work here before they go into collections of ebooks. I have a slight change of plan now which delays the ebook publishing part and focus more on completing the library here first. In another words, I am accelerating the speed of posting various specific trading setups in coming weeks. i will deal with the ebook idea later as that slow me down quite a bit when I have to keep thinking about the organization issue.
The vision is that these specific trading edges or statistical biases that are useful for daytrading will be linked to automatically on the signal pages. Everyday after market close, you will be able to review and prepare yourself for next trading day knowing exactly which biases are triggered and how they perform historically.
This should complement the existing premium reports nicely.
If I am going to tell you that there is one simple day trading setup that works all these years you will probably think that I am kidding. What if I tell you that this setup is long only, strictly day trade from open to close? I must be joking, right?
Here is the dollar gain chart based on the setup. See it yourself.