## Blog / Our Decision making process about preferred direction for overnight position. #3

### Our Decision making process about preferred direction for overnight position. #3

**Completing the second point of the puzzle solution, Technical analysis of current market conditions, before making the decision about overnight position.**

Considerations before proceeding:

Does the technical analysis

A. Has no impact on the Position size at all, since it is controlled by calculated win probability.

B. Has some impact on the pos size, so that if it supports the

prediction direction, than the position size will be bigger than

average.

C. It has the complete blocking capability, so that If major tech

conditions are against the predicted direction, than we take no

position at all.

(Most of the time we go with the “B” scenario, so we increase / decrease the position size, depending on the classical tech analysis, occasionally we go with the “C” scenario. But the impact still can be small and big. Increasing the pos size by 5 - 10% if all tech conditions aligned and supports the predicted direction is a small impact, but increasing / decreasing it by 30 – 50% is a considerable impact.)

Need to complete a 5-Step process in this part of the decision – making process:

The following five technical analysis aspects might have considerable importance for the overall profitability of our market participation.

**1. Trend Analysis.**

**2. Support / Resistance analysis.**

**3. Overbought / oversold condition analysis.**

**4. Gappiness analysis of the recent past. (Previous 10 **

** Days to 1 Month period.)**

**5. Technical analysis of major international markets.**

Every trader might have different methods, to complete the above mentioned five technical analysis steps. So we try to be general.

**1. Trending Analysis.**

** **The first question is on which time-frame we are looking at?

We check the trend direction on the 60 Min, Daily, Weekly and

Monthly time frames, the first two being the most important for our

decision. We can characterize market behavior on any time-

frame as:

- Strongly Up-trending

- Up-trending

- Moving in a Range

- Down-trending

- Strongly down-trending.

One example for a strongly Up-trending market is the NASDAQ market on the Daily time-frame between the beginning of Sept 2010 and the beginning of Nov 2010 period.

During this time the price was constantly above the MA20 of the daily closing prices, the direction of the moving average was strongly upward, and the number of up days well surpassed the 60% of total days, or even the 70% of total days.

Usually when we are in a normal uptrend, than the number of Up bars / Green candles take about two thirds of the total number of bars / candles.

In this case the market stayed above the SMA20 and moved upward in a tight channel, characterized by the (SMA20 + 1 * STD) and (SMA20 + 2*STD), where STD is the standard deviation. We could see this by drawing two pairs of Bollinger bands on the Daily chart, using the default SMA20 average, with STD * 2 and the other with STD * 1

Most of the time we do not wait for a market to change direction or trend to get in the market, as it might be a little bit late.

For example Using the WMA10 / SMA10 crossover on the Daily chart (Where WMA10 is the 10 period Weighted moving average and the SMA10 is the 10 period simple moving average.) we might get into the market on average 2 – 4 days before the direction change on the SMA20, and actual trend change.

We stated many times, that the actual Win probability of the Daily prediction is notably better in the direction of the trend.

For example if the predicted direction is in the same direction than the direction of the SMA20 on the hourly chart, than the win probability increases by about 3.2%, compared to the calculated average win probability for a special situation for the next day.

So if the calculated Daily win probability is 75%, than the actual win probability might be closer to 78.2%, if it is in the direction of the SMA20 on the hourly chart.

If we are checking the trend on just two time – frames, the hourly and the daily time-frame, than we might have at least four different situations.

A. The Daily trend (SMA20 dir) is Up and the Hourly trend direction (SMA20 dir) is also upward.

B. The Daily trend (SMA20 dir) is Down and the Hourly trend direction (SMA20 dir is also upward.

C. The Daily trend (SMA20 dir) is Down and the Hourly trend direction (SMA20 dir is also Down.

D. The Daily trend (SMA20 dir) is Down and the Hourly trend direction (SMA20 dir) is upward..

The “A” and the “C” situation is easy. When we have situation “B” or “D”, than we need to weight these together and put higher weight on the time-frame, which has higher importance for our market participation.

By Playing the pedictionwizard predictions the most risky proposition can be to play Short during strongly up-trending or playing Long during strongly down-trending periods. In these cases the time is definitely against us when we consider the market participation or the position size.

**2. Support – Resistance Analysis.**

** **These are special levels, when we expect some new market

participants to come into the market and buy or sell assets.

Again, it is time frame dependent.

What can constitute Support / resistance:

- Minimum, maximum levels. (The Current intraday

Minimum / Maximum, if we are trading in the afternoon, the Minimum maximum of the previous afternoon or the whole day, the Minimum / maximum of the previous 5 Days, 30 Days, 3 Month, 6 Month, One year, 5 Years, 10 years… The minimum / maximum levels of certain market periods. (Levels, happened earlier, but not necessarily minimums / maximums.)

- The lower levels / upper levels of certain trend channels.

- Major moving averages can also play as support or

resistance. (SMA20Days, SMA40Days, SMA50Days,

SMA200Days, SMA50weeks, SMA 200Weeks..)

- Fibonacci retraces / Fibonacci extensions.

- Bollinger bands at different standard deviations (2 as

being the default.)

** 3. Overbought / Oversold condition analysis.**

** **This type of technical analysis shows probably the biggest

variety among traders.

One reason might be the number of different indicators

available, the easiness to create new indicators for this

measure and the fact, that this has the least importance,

compared to the previous aspects of the analysis, especially

during strongly trending periods, when many of the overbought /

oversold market indicators simply could be thrown out of the

window, and has relatively low importance.

The importance of this type of analysis increasing during range

market periods.

The overbought / oversold indicators are cyclical indicators,

and usually move between a predefined minimum and

maximum range. Quite often this is the 0 – 100 range.

Some examples for this type of indicators:

- The RSI Relative Strength Indicator.

- Stochastic oscillator.

- Advance / Decline Line.

- McClellan Oscillator.

- Price Momentum Oscillators (PMO-s).

- Indicators, measuring the percentages of stocks:

- Above / Below the 40 Day moving average, 50 Days

moving average, 20 Days, moving average.

- Up-trending / Down-trending on a specific time-frame.

- Above / Below the Bollinger band, using SMA20 + 1*

STD, or SMA20 + 2*STD for the Bollinger band

construction.

- Percentage of stocks on the different exchanges hitting

new monthly, or yearly Maximum or Minimum levels.

Sometimes we use the ratio of the number of stocks

hitting new yearly maximum divided by the number of

stocks hitting new minimum. Other times we might use

the difference of these two counts.

Traders might adjust the position size depending on where we are in the market relative to the current cycle. The following image shows 10 points within a normal cycle.

We can consider different size of Long and Short position, depending on where we are currently in the cycle.

Looking at the image the difference between point “2” and point “5” is that in the first case eth market in moving Up, so the size of the Long position can be bigger than average, whereas at point “5” it is in a slightly overbought condition, but moving down.

Swing traders often open short position at point “4” or “5” or in between these two points and often open long position, when the cycle indicator is at point “9” or point “10” or in between these two points.

**4. Gap analysis of the recent past. (Previous 10 Days **

** to 1 Month period.)**

** **A GAP means risk for the overnight position trader. It can be

very rewarding, but it can also be a costly game.

We pointed out in different articles the following things to

consider:

- The Daily predictor has relatively low success rate to predict

the direction of the Overnight GAP. It is about 52%, so it

give us little edge.

- The capability of the Omega prediction to predict the

direction of the overnight GAP is much better, it is about

65%

- The Total GAPs in the direction of the trend during a

month in a trending market can be much bigger, than the

Total GAPS in the opposite direction. (Usually the

total GAPs 1.5 – 5 times bigger in the direction of the

trend.)

- What we really need to consider is the GAPPINESS of the

market during the recent past (Most recent 15 – 30 market

days.) If the Total Daily Range to Total GAP ratio during the

past 30 days is below 2.7 - 3, than we consider the

market too GAPPY, too dangerous to play with

overnight positions.

Markets tend be show more GAPPINESS during High

volatility (High VIX) periods.

- During a strongly trending period, Big Gaps tend to occur in

the direction of the trend, whereas during range markets big

GAPS occur more evenly in both directions. But markets

can transitions quickly from range markets into trending

markets and vice versa.

Some of the situations, when the result of the above detailed five areas of technical analysis might lead us not to open the overnight positions. (Blocking the position opening process.)

- The GAPPINESS of the market is way too high (The total

range to total GAP ratio is too low and / or the predicted

direction is not in the direction of the current

trend.

- The predicted direction is Short / Long, but the market

currently at a point, which considered critical and extremely

strong support / resistance level.

**5. Technical analysis of major international markets.**

This is also part of the analysis but always has impact only

on the position size considerations.

Most of the above mentioned technical analysis could be completed well before the market close to take into consideration in the overnight position opening.