Rather than give a description of this strategy, it might be better to treat the strategy as a computer programme. Alas, drawing flow charts is a tiresome task so here is a programme that is written in the old-style, numeric line basis (often called ''basic programming'' for very obvious reasons).
Bullish scenario
100: Look for the opening bell 30-minute trading range on the S&P 500; measure the high-to-low range and if the open range is bullish.
150: Look at the final 30-minute trading range before the S&P 500 closes; measure the high-to-low.
200: If the closing trading range is greater than the open range by two or more points, then we have more sellers than buyers so sell at the close looking for a minimum two points or more.
250: If the closing trading range is less than the open range by two points then assume we have more buyers than sellers and go long looking for two points-plus.
The assumption being that day traders will establish positions (as will major market players) in the initial opening 30 minutes. Likewise, in the final 30 minutes you want to know if they are all closing their trade positions.
If they aren't, then we have to assume some want to remain in their positions overnight so you are effectively determining the market weighting for bullishness/bearishness.
A bearish open is the inverse of the above.
An improvement on the above would be;
100: Look for 30 minutes prior to the opening bell and the subsequent 30 minutes after the opening bell for your trading range – effectively the one-hour range.
150: Look at the final hour's trading range etc.
It's admittedly a simplistic model and I will let you back-test... but you will be surprised at the results of this strategy.
Do we have other obvious trade areas that we all watch, like the above?
The failure rate is clearly another obvious topic. When we have a favourite trade setup that normally earns on balance for us, do we consider what the stopped-out trades may tell us?
Perhaps we should record the success rates and average drawdowns – or better still, the maximum drawdowns – but apart from the efficacy of the trade structure and profits when measured to losses, we should also look at the frequency of losses.
Most CTA funds will consider these bare minimum statistics;
Total number of trades
Average profit/loss %
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Average bars held.
Number of winning trades
Average profit %
Average bars held.
Maximum consecutive winning trades.
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Number of losing trades
Average loss %
Average bars held
Maximum consecutive losing trades.
The final point is a trade strategy in itself. When you match the maximum days of consecutive losing trades do you stay away from the market or take the trade with perhaps a higher confidence value in the trade?
The above image shows that exactly this very situation occurred and the subsequent trade proved successful.
When you see an open trade starting to exceed your normal average bars held, then typically you need to look closer at the trade as it is moving outside your normal trade parameters.
Successful trades are obviously great to have and a prerequisite to maintaining a healthy trading account but again, when we record our trades we will start to see patterns for maximum consecutive successful trades.
I you start to near or exceed previous maximums then perhaps use tighter stops or scale the stake size downwards.
All very obvious stuff, but in these busy times we all need to consider if we should do the obvious.
Recently we have witnessed ''market panic/fear'' (yen, cable, etc.) but how do we measure this? What determines our assessment of panic? Volume and price? Consider the QQQ (Nasdaq) – were the recent drops severe due to en masse collapse or were there distortions to the market?
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Source: Saxo Bank
Note how we can see certain corporations can grossly move market sentiment and direction. Exxon Mobile, Google, Facebook and the like have such a colossal influence to their respective marketplace indices that it is perhaps obvious thing to watch these equities as "canary in the mineshaft"-type signals?
If these giants start to fall then you know the index will fall with them. Obvious, isn't it? But now that we have had a fall, what next?
An obvious equity panic trade on the major equities above?
Tick charts measure predetermined contracts per OHLC/Candle-bar. They can be displayed as either a predetermined contract size (after which a new candle appears) or as a measure of time and each timeframe that lapses the tick value is displayed.
On the latter scenario, value can reach approximately plus or minus in the region of 1,400.
When you have five consecutive 30-minute tick bars on equities that have a value beyond minus 400, then await the sixth tick bar, buy when it reaches the five-bar low and sell when you accrue 1% net profit or should the tick exceed a gain of 400.
This trade can take up to 10 subsequent trading days!
Over the last five years on XOM, assuming you physically bought the equity, if via CFD then your percentage profits would be greater as you use margin and leverage (but incur daily interest charges).
Total number of trades triggering 174
Average Profit/Loss% 0.5%
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Average Bars Held 4.2 days
Winning trades 136 = 78.16%
Average Bars held 3.59 days
Maximum consecutive winning trades 21
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Losing trades 38
Average bars held 9.2 days
Maximum consecutive losing trades 5
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The above is the raw result. The obvious factor is the duration, making the limit of five days of would curtail losses values as losses would slightly be minimised and thus profits enhanced but if we now adjust the the tick value to 600...
- Average profits would rise to 0.85% per trade (profit percentile would be greater via CFD)
- Losing trades would drop to two
- Duration drops dramatically on winning and losing trades
Sometimes trading the obvious requires record-keeping to make the obvious adjustments.
As often as not, we see the outcomes of our trading purely through our account statement but perhaps we should consider keeping data such as the above to see our trading through a different lens, as it may shine a light on new and different opportunities.
Hopefully all of the above will make you reconsider your trades. I am not trying to be sarcastic or inflammatory with the use of ''obvious'' throughout the commentary. I am merely trying to highlight areas that a typical fund manager would jump onto... perhaps if we are trading with our business hat on, we too should consider similar topics?
The goal is to trade using a fund manager's view. Photo: iStock