Wednesday, October 10, 2007

A Trading Framework In Progress

Let ABC be a lookback period and P be a price level within ABC period. Over the next ABC period, what are the odds of the market touching P, given conditions XYZ.

Example: ABC is the overnight range and P is the volume-weighted average price for the preopening market. What are the odds of returning to P during the morning, given that the market opens above P on low volume?

Example: ABC is the previous day's trading range and P is the low price of that range. What are the odds of breaking below P during the present trading day, given weak upside momentum during that prior day?

Notice that ABC can refer to any lookback time frame and P can define any target price reached during the ABC period. The conditions XYZ define variables that affect the probability a move to P over a given historical period.

Because ABC can refer to any prior time frame, trades can be set up across multiple time frames based on observed, tested patterns.

More on this trading framework and the backtesting process in an upcoming post.

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How I Trade
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