In my last post, I observed that the behavior of the S&P 500 Index during its day hours (open to close) was quite different--and independent of--its behavior during night hours (close to open). As I noted on my Trader Performance page, this calls into question market analyses utilized by daytraders that incorporate overnight data.
Unfortunately, overnight information is embedded within many traditional technical indicators utilized by daytraders. These include, not only price series, but such measures as TRIN, advances/declines, and oscillators covering multiple days.
Above we have a chart that features three advance-decline lines and SPY, going back to early March, 2003. The dark blue line is a traditional advance-decline line derived from the 17 stocks in my Institutional basket. These issues are highly liquid stocks that represent the major sectors that are part of the S&P 500 Index. My historical studies have found that these stocks track the SPX quite well.
The yellow line is an advance-decline line derived solely from the overnight performance of the stocks. In other words, we are cumulating the gap between the prior day's close and the current day's open. Note the persistent upward trend--precisely the same pattern we saw with the "Nighttrading" S&P Index from the previous post.
The red line is an advance-decline line built solely upon the day session performance of the stocks. Here we are cumulating the open to close performance of the stocks. Observe that we have a rather steady downward trend. This is the same pattern we saw with the "Daytrading" S&P Index in the last post.
The traditional advance-decline line is basically an amalgam of the two lines. It does not reflect actual stock performance experienced by a daytrader. For that, we might need to use an advance-decline measure drawn solely from day session (open to close) data. Similarly, any effort to assemble overbought-oversold measures for the market should draw upon day session performance: the actual market being traded by the daytrader. It may well be that technical indicators so constructed would do a better job than traditional measures at identifying tradable patterns for the daytrader.
Perhaps the following example makes the issue clearer. Let's say that I live in an area of New Mexico at high altitude. You wish to visit me and ask me what kind of clothes you should pack for the climate. I tell you that the average temperature is 60 degrees F., and you accordingly pack a light sweater and jeans. When you arrive, however, you find that daytime temperatures hit the 90s and nights get into the 30s. The average temperature did not help you pack; it obscured important differences between day and night.
By looking at average price performance across entire days, daytraders can similarly obscure important day and night differences. What does it matter that "the trend is up" or "the market is strong" if the trend has no statistical bearing on the hours that you are trading--or, in the case of the advance-decline numbers--a slightly *negative* correlation (-.22)?
And if your goal is to capture trending behavior in the markets, is daytrading an appropriate strategy? Does closing positions at the end of the day lower risk, or does it reduce reward?
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4 comments:
Hi Brett
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...if your goal is to capture trending behavior in the markets, is daytrading an appropriate strategy? Does closing positions at the end of the day lower risk, or does it reduce reward?
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I have been trading emini S&P futures intraday, not because it is an ideal strategy but because it seems to suit my personality.
When I first commenced trading emini SP, my mentor impressed upon me that swing trading would give me a better reward ratio in the long run. However, I did not fare too well in swing trading.
So I choose to focus on intra day trading, which may not maximize my gains but it gives me consistent profits with new indicators being tried like MarketDelta footprints.
Closing postions at the end of the day may not always reduce risk nor does it maximize rewards.
Now that I am gaining some confidence trading intra day, I have been seriously thinking of adding swing trading to S&P to maximize my rewards if the trend is strong.
One step at a time, although many start with swing trading and then go on to intra day trading, which requires a certain degree of flexibility, I was told.
Hi,
I think intraday trading can be successful, but I've found the greatest success utilizing market information that is solely generated intraday, such as NYSE TICK and the Market Delta information. Most of the price patterns tested by Trade Ideas, as well, are generated intraday. It's when traders are making intraday decisions using inter-day data that I think problems can ensue.
Ultimately, the time frame we trade should reflect personal preferences and personality style, but also should reflect where we find our greatest opportunities. Thanks for the note!
Brett
Another fantastic series Doctor Steenbarger - I can attest that over the years I have stripped off all "long term" technical indicators and now use the 4 minute TICK, the VIX (direction of movement on 4 minute increments), 4 minute price bars, and three EMA - 4, 8, and 21. Nothing fancy.
I have found through (costly) experience that everything else is either a distraction or misleading.
Your other commenter, yintrader, noted it correctly - most intraday traders started as swing traders.
Looking forward to your article on volatility.
Thanks, John. I think you make an excellent point. Stripping down to a few important measures and learning their patterns well is far better than trying to follow dozens of variables--especially when many of them may not actually capture patterns in the time frame you're trading. I appreciate the note--
Brett
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