Blog / Predictor playing strategy design considerations.
Predictor playing strategy design considerations.
1. The signal to trade:
- What kind of data to take into account when formulating the trading decision and what are the weights of those data (Need to be defined.)
Might Consider in our decision making and position management process:
- Trending direction and strength on the hourly time-frame.
- Trending direction and strength on the Daily time-frame.
- Daily prediction data.
- Omega prediction data.
- Weekly prediction data.
- Monthly prediction data.
- Resistance levels.
- Support levels.
- Gappiness (During the past 10 – 30 days.)
- International market action and status.
- Economic and market Cycle status. (Cycles of different time-frames.)
- Scheduled and Non scheduled economic and other NEWS.
2. Selecting the Asset Class / Index to use as a vehicle:
Sometimes the NASDAQ / NASDAQ100, other times the S&P100, S&P500, S&P400 or S&P600 might be the good selection.
At the very beginning of a Bull market the Small Cap and Mid Cap perform better than the big Cap or Huge Cap.
Toward the end of the Bull market Cycle, the High and Huge Cap might be a better selection, at least for the Long plays.
Also keep in mind the other world indices. When the S&P500 moves Up 10%, smaller indices in Europe, Asia and South America might move up 15 – 50%. Same is true during a Bear market.
Also note that with the probability of higher returns also comes the probability for higher Risk.
They might fall much more, as the capital search for safer investments.
At any specific time we need to have a ranking of the indices regarding performance / strength.
Play the stronger indices for Long positions and play the weaker indices for Short position.
Might also consider:
In case of a Bearish prediction and the S&P500 as a weaker index, instead of selling the index or related stuff, might sell the weakest 1-3 sector(s) within the S&P500 index.
For this to complete: Need to track the sector performances for example by tracking the sector ETF – s.
To find the weakest sector / stocks in an Uptrend / downtrend, it is enough to calculate the correlation of the individual stock with the index, using the past 30 – 90 days of historical data. If it is highly correlated, than it is probably a leader, if not than it is probably a laggard.
During very big uncertainties, like the EU crisis bottom during 2011 Nov, when both the Italian PM (Berluscony) and the Greek PM left the boat, the ensuing sell off was stronger in the Tech sector.
Always consider the Relative Strength (Stronger or weaker index) before asset class / type selection. As Index – related trader, most of the time the selection is from either S&P500 – related leveraged asset or NASDAQ / NASDAQ100 – related leveraged asset.
To have a quick estimate of the relative strength of the NASADQ / NASDAQ100 and the S&P500 indices, it might be very useful to view them in the same Charts on different time-frames, like 15 Min, 60 Min and Daily and Weekly time –frames.
Those (Like Hedge Funds) who manage huge assets, might play the Bullish / Bearish predictions differently, by focusing on individual stocks, instead of direct Index – related assets.
One example is that in case of Bullish predictions opening Long positions for the 10 – 30 most Bullish, strongest companies, and in case of Bearish predictions opening 10 - 30 Short positions for the weakest components of the selected index or playing the market with the leveraged asset classes of those individual companies. (options, CFD-s…)
Other idea may be to play the Long / Bullish prediction, but playing with the strongest sector(s) of the S&P500 index and playing the Short / Bearish predictions with the weakest sectors of the S&P500 index.
The major sectors of the S&P500 index:
XLB Materials Sector
XLI Industrials Sector
XLY Consumer Discretionary Sector
XLP Consumer Staples Sector
XLE Energy Sector
XLV Health Care Sector
XLF Financial Sector
XLK Technology Sector
When selecting the asset to trade:
When evaluating the Omega predictions for the market, MUST check BOTH the NASDAQ and the S&P500 charts to make the decision. So it would be ideal to have the 1Min and 5Min charts (Besides other time-frames) of the NASDAQ100 and the S&P500 presented at the same time.
3. Position Management Rules:
- Define the 100% size for the Asset Class, selected for market participation.
- Take into account the VIX . The 100% position size is defined for a pre-selected VIX, say 20 – 25. IF the VIX is bigger or much bigger, than consider not playing the strategy, or playing it with rescaled position size. (The maximum size will be smaller to have the same win / loss in a specific trade.
For example: What is the position size if VIX = 40
The new Maximum (100% at VIX = 40)) = Maximum (at VIX = 25) * (25 / 40) = 0.625 * Maximum (At VIX = 25)
- If VIX is noticeably Greater / Smaller after 60 – 90 minutes of the regular market open than the Average VIX value of the past 5 – 10 days, than it might be useful to take that into account in the intraday trading and position management decisions.
- Use the Relative Price / Index level on the Daily and weekly charts to the
Bollinger bands, and at the same time the relative position to the 60 min, Daily and weekly support / resistance levels.
If the price levels close to the Upper Bollinger, and at the same time close to other resistance levels, than consider decreasing the position size in case of a Bullish prediction. (For example ActPosSize = 0.75 * MaxPosSize) Similarly if the price is between the SMA20 and the upper Bollinger, but closer to the upper Bollinger, than consider decreasing the size of the Long position.
On the other hand if the price is at the lower Bollinger level, or between the SMA20 and the lower Bollinger level and we get a Bearish prediction, than consider decreasing the Short position size (For example ActPosSize = 0.75 * MaxPosSize) , if we are close to other support levels on the 60 Min, Daily or Weekly charts.
Of course the direction of the SMA20 is also very important. Assuming that it points upward in case of a Bullish prediction and points downward in case of a bearish prediction.
- After a Huge Down day in a Bear market If we get a Bearish signal, consider to Wait until the next open or consider opening a smaller position, as the market often snaps back a bit, before continuing the down move.
Similarly after a Huge Up day, if we get a Bullish prediction, it might be OK to wait with the position opening until the next open or opening a smaller position, as the market often pull back a bit, before continuing the up move.
This is less important for Bullish predictions in a Bull market, than the consideration for Bearish predictions in a Bull / Bear market.
It is also usual to have a small range / consolidation day after the huge move, so that the potential gain by opening the position before the market close is relatively smaller, below average.
4. Position Entry / Exit / timing / sizing:
Assuming that we got a Bullish prediction and plan to open Long.
If we open the Long just before the regular market close or soon after the regular market close, than it is highly probable that we will not get the lowest possible price, it is very probable that the market will show a price level, at least 0.1 – 0.6 % below that level (Referring to Index levels here and not leveraged asset valuation levels.) during the overnight market period.
It might be worth doing market research and find answers to the following questions:
(We can do that by showing only the overnight market range and do the analysis on that separated data.)
- Collect statistics what is the X[%] probability (Say at least 75 – 85%) that the market will show a price level 0.25 [%] below the regular market close, assuming that we have a Bullish prediction during Up-trending market on the 60 Min, daily, weekly time-frame, Down-trending market on the 60 Min, daily, weekly time-frame, Range market on the 60 Min, Daily, weekly time-frame
The VIX will impact the probabilities here, so a good research area would probably be not the absolute percentage levels below / above the regular market closing level, (During the night session) but the VIX adjusted, or normalized level below the regular market closing level.
We might consider opening the Long position in multiple installments by placing Buy-Limit orders on different levels, the first package (Presumably the highest size) closest to the regular market close, and the other(s) below that level.
- Try to keep psychological strength at maximum: Assume that we get a Bullish / Bearish prediction, which is not that clear / strong signal. Hesitating, and not opening position.
The next day (Happened on Nov 9-th, 2011 the market opens with huge Gap down, but unfortunately we are not on the train, as we did not play the Bear signal.
The next day again, we get a Bear signal after the huge down day. Assume, that we open a short position for overnight play. but unfortunately the market opens Up big, by more than 1%, so that our psycho is pretty weak, pressured, as we did not play the Huge profit prediction, but unfortunately played the loser prediction immediately after the first miss. This could be a real blast to our confidence, so it is better not to play the second prediction either or play all, but consider only position size. If have less confidence, play with smaller size, but PLAY all signals.
- Playing overnight signals during the weekends.
Generally we do not suggest to play predictor signals during weekends and longer holydays, as the market might GAP too big and surprise us.
But in some cases this can be resolved, at least partially.
For example We get a strong Bullish Daily prediction and strong Bullish weekly prediction, and also get Bullish Omega predictions on Friday, at the close, but we do not want to take the risk until Monday, fearing the huge impact of the Asian, European markets.
But knowing that the correlation of the US market with the European market is pretty high, we can open the Long position many hours before the regular US market open, after we see, that both Asia finished the day strong and / or the EU markets looks strong during the first 15 – 180 minutes of trading.
The importance is that we might be able to buy the Long at lower prices hours before the regular market open, and at the same time with much of the risks already eliminated.
5. Other considerations:
- Our experience and tests suggests, that the overall yearly profit expectations might be higher or much higher, playing the market with multiple position entry and exit levels.
That is gradually scaling in and scaling out of positions.
But obviously this kind of play has the disadvantage or additional costs of the increased brokerage fees, so it is viable (worth) doing only if the individual packages (bought / sold) are big enough to have the profit potential, that is at least 15 – 20 times bigger than the brokerage fees.
Assume the following scenario as an example:
We open a Long position after the market close, having our requirements for a Bullish market entry met.
Next morning the market looking to open o.5 [%] below our
position opening price level.
What do we do? Buy more, or sell, or do nothing?
We wait, prepared to be ready for both opening an additional Long position and also prepared to unload the existing Long position.
Very probably we will be able to make the correct decision within the first 10 – 25 minutes after the market open.
We also know that we have considerably higher probability on our side, that the market will move up, even if drops in the first 1 – 5 minutes. (The up move might not be the expectation, If the market opens down more than 1 [%] and begin to dive furiously, That behavior invalidates our Long view quickly.)
So assuming that we already have a Long position initiated at higher levels (At Yesterday’s close) we decide to add another Long position within 15 minutes after the regular market open.
Now our positions are set, and the question is how to unload what we have during the day (Assuming that we are doing day trading)
It is very probable, that at least a temporary resistance will be seen at the previous day’s closing level.
If we exit / unload all of our positions at those levels, we might limit our daily profit by a lot. So a much better strategy would be to exit / unload only a portion of our position and keeping the rest for higher potential profit.
Scaling into positions using 2 steps and scaling out using 2 – 3 steps (or more, depending on our resources.) might be much more profitable than without scaling.
Not to mention, that scaling out gives us the positive mental feedback that we already reached and realized some of our profit expectations and decreased our stress level to reach higher with the remaining position. But if we experience losses, that it is advised not to wait to much and unload the loser position in two or even more steps, but doing it quickly in one step, if that is what the market movements suggest.
- When we design our trading / market participation strategy we need to take into account, that the Daily, weekly and monthly predictions have similar characteristics, and that means their impact is the strongest at the beginning of the prediction period and weakest at the end of the prediction period.
For the Daily predictor this means, that we expect the market to move in the direction, predicted by the Daily prediction (Assuming that the market is Not opening with a huge Gap Up or Gap Down, which would mean that something really big happened overnight.)
The Omega prediction has different characteristics. It has not much effect on the direction right after the market open, but rather the tendency and market moves during the day. It is better at predicting what could be expected from the overall daily action and market close.
- Early signs, that a predictions might not be a winner.
If we open a position after the close and on the next morning we see that the market is about to open 1 [%] or more against our position, than our chance to make it a winner is relatively low. So our focus should be on how to decrease losses in that situation.
But it depends a lot on many other little details.
For example If the market had a strong support level 0.5 [%] below or Long position opening level, and the market opens 1 [%] below our purchase price, than our chance to see a quick upturn right after the market open is much smaller.
If the strong support level is 1 [%] below our Long position opening level, than we have slightly higher chance, that the support level will hold and eventually the market reverse course to the upside.
Those, who know how to use Support and Resistance levels, Bollinger bands on different time –frames, the Fibonacci extension and retracement levels… will have a better shot at evaluating possible market action at those levels.
- We know that it is a feature of the market that it try to mislead as many players as possible and channel the big profits into the hands of a very few. So wee need to be prepared and always need to have a Plan “B”, in case our first plan, the plan “A” is not panning out as we expected. If we have a lot of experience analyzing charts, than we might be able to find a lot of technical traps, that the market posed to the masses.
Just by being aware of those potential traps, we can be much better off by acting sooner or acting differently.
- Our strategy need to serve many important objectives:
- Continuous profit generation.
- Limiting potential losses.
- Must help to keep us in good mental and physical shape.
- Give us feedback about weekly, monthly, yearly performance
and many other metrics.
This feedback should be a crucial process which can help us
to improve our performance as we get more and more
experienced and more successful in our trading.