Saturday, October 01, 2016

An Update of the Trading Model

TraderFeed will be taking a sabbatical during the month of October, with occasional postings on the market and on trading psychology.  During the sabbatical, I'll be finishing a co-edited book on brief therapy and completing a personal project.  That personal project will be a major subject during November's posts.

Over the October sabbatical, I'll also provide occasional updates of scores from my multivariate model, which I've revised to include a new measure of sentiment.  That new measure views put volume and call volume as independent variables, rather than simply taking the ratio of the two.  So we look for occasions when put volume is unusually high or low and the same for call volume.

Model scores range from +6 (very bullish) to zero (neutral) to -6 (very bearish).  The chart above shows average 10-day returns as a function of model score from 2014 to the present.  Hit rates on trades taken mechanically have been as one would expect from the above chart, with 64% of trades finishing up when scores have been 1 or 2; and 63% of trades finishing down when scores have been between -2 and -3 and very high hit rates at the bullish and bearish extremes.

We closed Friday with a score of +2, moderately bullish. 

Further Reading:  What We Can Learn From Quant Models