Prediction Wizard

When we prepare to make the decision  about  participating in the stock market in some form or another, we consider factors like the following:

-          Amount of time need to  complete the job.

-          Our availability. Can we allocate all of our work-time to the project or only part of it.  Is it a part-time job or a full-time job. (Preferred not to start this business as a full-time job,

until we get to a certain level.)

-          What is our favorite or preferred style?  How many trades are we planning to complete during a year? 

-          …

Obviously to make the decision we need to collect facts, or evidence that  support or decision knowing  many other factors.

In this analysis  I try to compare only three distinctly different  trading or market participation:

1.       Trading  or participating in the markets  as a long-term trader or investor, holding  positions for  at least  a few month and preferably for many  years.

2.       The second type of trader I  envisage here is the so-called overnight trader.

This trader opens a position  before or soon after the regular market close, and  holds that position  overnight.

The swing trader, who holds her / his positions for multiple days or weeks is a special type of overnight trader.

3.       The third type of trader that I  would like to analyze here is the intraday trader.

This trader opens and closes her / his position(s) the same day during regular market hours.

There are many subtype of intraday traders, usually differentiated by the number of traders they complete during an average trading day.

Some of them complete only 1 – 2 trades a day.

Others (most of them)  complete 2 – 5   trades a day on average.

The third category of intraday traders complete 6 – 16 trades a day.

The fourth category of the intraday trader complete much more, usually 40 – 160 trades a day (scalpers)

To simplify  my analysis  for the  long-term position holder, overnight trader and intraday trader I  looked at, and compared the performance of the NASDAQ100 ETF during the past 12 years (Since June of 2000 till June 16-th of 2012)  for  the following  type of positions:

1.  The trader opens a position at the beginning of the trading period and closes

     the position at the end of the trading period.

     Assuming that this trader was  in the market during the past 12 years, the

     balance  of her / his position  changed  along with the  chart, that most of us 

     so accustomed to, which is the historical   performance of the QQQ ETF

     presented below:

     As we can see, this type of trader  lost about 30 [%] of  the initial account   

     balance in  absolute terms (Not to mention the depreciation of the dollar in

     the meantime.) In real terms, the purchasing power of  the current balance is

     below 50 [%] of the original  investment value. Assume that the starting

     account balance was 100 K [$]

  2. The second trader  plays only the overnight market.  In our example

      she / he is opens a position every day at the end of the market day,

      and  closes that position at the next day’s market open. This position

      not hold during the regular market session.The next day  the trader

      complete the same trade at the market close. And it goes on and on. 

      The  trader have overnight positions every night, so that  the overnight

      market moves will impact the account balance, but never participate during

      the regular daily market movements.  The starting account balance is also

      100 K [$].

      In this simplified case  the balance of her / his account  will show the

      following shape, as presented  on the chart below.

What we can see is that the original 100 K [$] amount swelled up  about 237 000 $, and did that without any major draw-downs during this 12 years period.

3. The last trader is an intraday trader who opens her / his positions every

    day  at the market Open and closes her / his position on the same day

    at the market close.

    This trader never holds overnight positions, but participates in the market 

    every day.Having a 100 K [$]  initial account balance,  this trader’s account 

    would  look like the following chart for the past 12 years period.

    This trader  have suffered major losses during the past   12 year period.

    As it could be seen from this chart , the account lost almost 80 [%] of its 

    value during the first two  years,  in 2001 and 2002.

    That market  probably killed the majority of the day-traders  in those two

    years. Not to mention  commissions and slippages that is not accounted

    here, but hit the  balance of the trader.

Some of the conclusion based  on this short analysis of position holding period  is the following:

-  The historical market chart is  nothing but  a false reality,  giving the feeling for

  the intraday trader that  huge sums of profit achievable easily by participating

  in a smart way, but actually  it is fairly  difficult to profit from,  especially if we

  consider that  the majority of  the historical market moves to the upside

  occurred during overnight.

-  if we analyze the first two years (2001 and 2002, which is about the first 500

  trading days on the charts) we see that the intraday risk is  very high, as the

  majority of the  market drop happened during regular  intraday market

  sessions,  and  even during this period the overnight trader had a positive

  balance account, and did not lose  money in the game.

-  From this three type of position holding period only the overnight trader

  benefited handsomely,    while the others lost  from their starting account

  value.

-  The last 3 – 4 years was a bit different in many ways. It was more balanced.

  All type of market participants   gained some profit during the last four years.

  It can be interpreted as a market which try to entice all kind of traders  back

  into the market (before potentially it collapses  again, hitting the intraday

  traders  the most.)  

-  Of course  this does not mean that all  intraday traders lost their account

  during the past 12 years only that it is much more difficult to consistently

  make profit, playing the intraday  market moves.

It is not a wonder that less than 5 [%] of intraday traders  make profit in the markets, while probably  more  than 20 [%] of swing traders make profit in the same markets and at the same time more than 50 [%] of investors / long-term holders  make profit, at least in absolute terms.

(Not  considering real purchasing power.)

The predictor can help us to make the best of all.  We participate in the overnight moves, but only  if it is probably moving  in the direction  of our preference.

As I mentioned before,  the regular  Daily predictor technology is not able to predict  the overnight  market movements  with  good probability as it predicts  the market moves after the regular market open, but our  Omega prediction  is really good at this job, predicting the  overnight market direction  with about 63 [%]  probability.

While the Omega, Daily, Weekly, Monthly predictions  support all kind of trading activity,  those, who take the risk of overnight positions  will benefit the most  from our  predictor  technologies.

Some of the most successful professionals  participate in the market  in all of the above mentioned time-frames, and  change only the distribution, weight, position size  of their market  participation according to perceived market risks and potentials. Such complex strategies could be developed only after a lot of market and trading experience.

Markets might  change posture  and behavior  many times during a  long trading career of 25 – 50 years.

Wee need to know  the internals of the market we are playing,  but  it is not enough.  Periodically we need to repeat certain  analysis about the markets  to  stay in synch with the reality and need to be able to adapt  our strategy according to market shifts or changes.