Blog / Our Decision making process about preferred direction for overnight position. #4
Our Decision making process about preferred direction for overnight position. #4
Completing the last two points of the puzzle solution.
Trading and predictor knowledge and economic and market news discovery, before making the decision about overnight position and drawing some conclusion.
1. Trading knowledge, predictor knowledge and experience.
Obviously this is a huge topic, and trading experience can’t be replaced with written material. So we try to cover only a few important aspects, that can help in our decision making whether to open overnight position or not.
- The nature of market movements and predictor behavior.
Markets go through different periods in time. If we look at
Daily charts we see trending periods, range markets, high and
low volatility periods…
One of the most important areas are the turning points on
those daily charts.
We noted in the learning center material that during a long up-
trending period we might have more Bearish Daily predictions
than Bullish predictions. (And during long Bear market
periods we might have more Bullish Daily predictions.)
This is because most of the time even in an up-trend the market opens lower on the next day or moves lower during the morning session of the next day, but often finishes the day above the current day’s closing levels. Since the Daily predictions more effective during the first 30 – 180 minute period of the regular market session we might get Bearish Daily predicted direction in Bullish, up-trending market periods.
We also note here that during the early phase of a direction change or trend change the market often moves up / down briskly, with gaps (We consider GAP as the difference between current Day’s close and next Day’s open but Not necessarily opening above / below current Day’s high or low, that is considered by many as Gaps.)
During the later stages of a trend and at the end of a trend we usually get much more overlapping between Daily bars / candles.
- Market turns.
It is crucial to pinpoint potential market turns early and
correctly.
The predictor system is doing excellent job in identifying
potential market turns.
We can check from the predictor history (Which can be
downloaded from the site for every indices.) that the predictor
system is correctly identified most of the major turning points
in the market, and did it way ahead of the competition.
Some examples: The predictor system correctly predicted a turn on March 9-th 2009, when we had the Bear market low in the S&P500, it predicted the upturn on July 10 – 13-th of 2009, when most of the professionals and market analysts predicted Bearish Head & Shoulder continuation downward, and among others the predictor most recently correctly predicted a Bullish upturn on Aug 31-th 2010 when a multi-month rally started that is still in effect Today on Dec 12-th 2010.
The key however is that the predictor is Not diagnosed the turn after it happened or predicted late as most of the competition, but before it actually happened. This way the predictor players had a chance to gain 2 – 8% profit (Playing the index – related assets without leverage.) by the time the other competitive systems noticed the shifts in the market.
Many of those major market turns preceded by divergences
within the indices.
We would advice not to make any trading decision based on divergences alone, but they could be very useful supports and precursor of any market turns.
- FMEA (Failure mode and Effect Analysis)
Researchers and engineers often use this quality assurance
methodology to improve the quality of a service or a product.
We also completed research to find out how, and when do our Daily predictions Fail.
We identified the five most important reasons, why a Daily
prediction might Fail.
Those Failure reason cover well over 80% of the Failure precedents for the Daily predictions.
These Failure reasons listed in the following table along with probabilities.
From this table we can see that the simple most important reason, a Daily prediction might Fail is: Opening Short is a Strong Uptrend. The 36.36% probability means that out of 100 Failed predictions that fall into the listed five category, 36.36% or 36 predictions Fail because of this reason.
The second most often encountered reason for a Daily prediction to Fail is: GAP against the predicted direction.
Having this knowledge we can easily improve our predictor playing success rate by adding more requirements for overnight position opening.
Since we know that playing Short in a Strong Uptrend is the toughest game, we try to be extremely cautious. (We know for example that 95% of the Put options expire worthless at option expiration days…)
For example we might require some combination of the following:
- Require that along with the Daily predictions the Omega
predictor give us a Bearish prediction for both the NASDAQ
and for the S&P500 indices.
- Require strongly overbought conditions.
- Require either a trend change to down or a Bearish cross of
the WMA 10 / SMA10 on the hourly / Daily chart.
- Require strong resistance levels or possibly multiple
resistance levels just above current levels.
Actually adding the Omega prediction as added requirement also help a bit to decrease the Failure rate, related to GAP-s against predicted direction.
I would suggest interested players to download the Prediction Charts for the Index in question and study the Failed cases to get a better feeling about potentials.
- Market action during the current day.
For some players this might effect only the position size to be opened, for others current Day market action can be a blocking condition to open overnight position.
To illustrate with examples I created the following image, with different current daily market action:
Market has a tendency to test previous day high and / or low or the high and / or low of the previous day afternoon session.
So for example if we get a Bullish Daily prediction for the next day and different kind of risk (as the image shows) than we might just adjust the position size, or if we estimate the risk to be bigger than our tolerance level, than we do not open position.
It might also be important, where the current price levels are relative to the price range of the previous 1 – 5 day range. Markets has a tendency to make a bigger move if we are outside of that range compared to the size of move staying within the range of the previous 1 – 5 day.
2. News (Scheduled news after the current Day’s close or before the next day’s market open.)
This has little or no added value for an investor, but it can be extremely important for the overnight position trader.
The importance of any type of scheduled news vary, as market sensitivity vary during long periods.
Economic data like GDP, PPI, CPI, Housing – related data, Trade related data, FED – related info, manufacturing, international trade, consumer sentiment, retail sales, profit reporting … all can be market moving events.
Instead of long descriptions, I would like to highlight one example:
We often trade NASDAQ100 – related leveraged ETF-s.
We also know, that the composition of the NASDAQ100, unlike the S&P100 which is very diverse, and the differences in the CAP – size of the NASDAQ100 companies are fairly big. For this reason every time, before the profit – reporting period starts we make a list of those scheduled report date and time for the 8 – 12 biggest capitalization companies within the NASDAQ100. We definitely not trade overnight positions, when any of the biggest 8 NASDAQ100 index component report quarterly profits.
Any of the Biggest 8 index component can move the NASDAQ100 index by at least 1%, so leveraged assets can move 2- 3% or in some cases even much more.
The first 2 – 3 weeks of any profit – reporting period might be risky, but in some cases we saw big moves even many weeks after the start of the reporting season. (For example one NASDAQ100 index component, RIMM, Research in Motion is a Canadian company and report profits usually well before / after the regular US profit – reporting season.)
The S&P500 is much less dependent on any individual profit reports, and usually makes smaller GAP in case of extreme reactions related to any single index component.
Summary and Conclusion:
The articles, presented to help your decision making about overnight positions might seem too complex or difficult to learn.
It is written this way so that You can simplify and create your own strategy and trading plan by extracting the information that you consider most important for your trading.
The more complex a trading strategy or trading plan, it is usually the less robust to use for long periods of time, possible for many years.
We mentioned that the Daily, Weekly and Monthly predictions are extremely robust, but not optimized predictions, so they will probably be valid for very long period of time, but little tuning can always be added, knowing that time – to time we need to reevaluate the less robust tuning aspects of any trading plan.
A plan (related to overnight position opening) can be as simple as three steps or can be as complex as multiple pages of written actions.
Very often some part of the decision – making process can be completed well before market close, sometime even hours before.
In our plan we can explicitly state those situations, that we consider blocking conditions against overnight position opening.