Blog / Daily Market Range Notes
Daily Market Range Notes
Some notes about the Daily Regular Market Range.
Whenever we start designing our market playing strategy, one of the input parameters will be the Daily Regular Market Range or “DR”, especially if we play the market on an intraday basis, being a day-trader.
So it worth to take a look and consider at least some of the basic properties of the DR.
What kind of impact can the DR have on our strategy?
As you can see below, it is extremely important.
- It can play a role in the selection of Asset Class that we are playing.
- It might impact whether we are playing the market during a certain period or not playing it at all, as the risk overweight the potential benefits of the game.
- It can hugely impact the yearly profit, that we would like to achieve during a year.
We define the Daily Regular Market Range simply as the following:
For other analysis we might also use the Daily Open or the Previous Daily Close in the denominator, but the conclusions will be similar for our trading strategy design.
For the sake of simplicity we will look at the S&P500 index and the Daily Regular Market Range in the index. For this I created the following chart about the last year, till the end of Feb 2013:
We can analyze the chart visually and we can make deeper analysis by computer on the available data.
After the analysis we can make a few conclusions:
1. The Daily range of the S&P500 has a cycle or even multiple cycles. The smallest cycle that is noticeable after careful analysis is a 4 - 5 days cycle. Often local peaks present every 4 - 5 days in the Daily range. Of course not with a Swiss clock precision, sometimes it takes 8 - 10 days or even more to form a local high in the daily range.
Some pro talk about the rhythm of the market. Yes it does have a rhythm.
2. The other cycle that is noticeable roughly 4- 5 weeks.
3. After a big range, the daily range of the next day is usually small, very often less than half of the previous day's range or even less than that. This might be very important to select position size the next day. The probability of a small(er) range after a huge range is above 80 [%]
4. The Average Daily range was about 1.46 [%] for the past 50 years, but only about 1.04 [%] for the past 1 year. This is only about two thirds of the long-term average daily range. Finding the reasons for the decrease of the daily range might reveal interesting internal specifics of this market.
5. Local lows present in the Daily range cycle very often one or two days after a big range day.
6. The fluctuations of the Daily Range is quite big, so does its effect on our trading result.
One day the Trading Range can easily be two three times the size of the Daily Range of the next trading day.
The distribution of the Daily Range in the S&P500 summarized in the following table:
Daily Range [%] (S&P500 Feb 2012 - Feb 2013) |
Pct of Days Within range [%] |
0 - 0.5 |
7.9 |
0.5 - 0.75 |
23.4 |
0.75 - 1 |
22.5 |
1 - 1.5 |
29.3 |
1.5 - 2 |
12.2 |
> 2 |
4.7 |
What we can see from that is for example that only 4.7 [%] of the days the Daily Range is greater than 2 [%]
More than 75 [%] of the time the Daily Range is in the 0.5 – 1.5 [%] range and more than 50 [%] of the time the Daily Range is below 1 [%].
If the potential impact of the Daily Range is that big, how can we detect a big or small Daily Range early in the day?
We know that volume is highly correlated with the Daily Range, We also know that the 5- 10 Daiy VIX Average can also help a bit estimating the Daily Range that is ahead of us.
Another very important professional method is to know, the Average Volume of our asset class 10, 15, 30, 45, 60, 120 minutes after the regular market open.
Bigger volume reinforces direction, so in case of bigger volume, we have higher probability for a trending day, but usually we see the biggest volume on major reversal days, when the market players go in with full energy and both the Bulls and the Bears exhaust themselves during the day.
A relatively good trader usually can get no more than 50 [%] of the Daily Range out of the market consistently by playing it.
This means that by playing the S&P500 index, the trader can expect to get 1.04 / 2 = 0.52 [%] as gross profit out of the market. For most players, the result usually below that level.
The cost of the trade can widely wary by broker and by asset class.
It can be as small as 0.01 [%] or even less investing big amounts like hundreds of thousands of dollar in stocks or it can be as big as 0.1 – 0.15 [%] investing in CFD-s, (Contract For Difference) when the spread of the buy and sell price is automatically set to be 0.1 – 0.15 [%].
When the cost of the total trades relative to the total net profit is bigger than 15 - 20 [%] of the average gross profit than the market participant probably only feeding the hungry brokers without real success or the margin of error is so small that it causes additional stress during market participation.
Small Daily Range might push many intraday traders toward the more risky leveraged assets. A really smart strategy helps to decrease the impact of the big swings in the Daily Range by selecting position size wisely.
I will write a bit more about that later.