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Determining range expansion for the ES (S&P eminis)
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Determining range expansion for the ES (S&P eminis)

  #1 (permalink)
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Determining range expansion for the ES (S&P eminis)

I am interested in a team effort to explore methodologies for determining when the ES RTH day's range will expand (or contract) for the following day (RTH). For reference a narrow day (ND) <12pts, medium day (MD)>12 and <15pts , wide day (WD) >15pts.

A number of possibilities come to mind:
  1. ATR > MA of RTH
  2. Change in range (Yest versus prior day)
  3. Frequency (e.g after 4ND in a row 3WD then 2MD)
  4. Sequencing (Inside day following MD where close is > 85% of day's range or <15% of days range)
etc.

If there are others who would also like to predict tomorrow's range at the end of the trading day then please let me know.

Thanks,

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aquarian1 View Post
I am interested in a team effort to explore methodologies for determining when the ES RTH day's range will expand (or contract) for the following day (RTH). For reference a narrow day (ND) <12pts, medium day (MD)>12 and <15pts , wide day (WD) >15pts.

A number of possibilities come to mind:
  1. ATR > MA of RTH
  2. Change in range (Yest versus prior day)
  3. Frequency (e.g after 4ND in a row 3WD then 2MD)
  4. Sequencing (Inside day following MD where close is > 85% of day's range or <15% of days range)
etc.

If there are others who would also like to predict tomorrow's range at the end of the trading day then please let me know.

Thanks,


Most of these ideas can be easily tested on daily data. I have coded two concepts that use the daily range.

(1) I plot session volatility bands on my chart. These show range expansions targets based on the 3-day-average and 10-day-average of the daily range. You can plot them for the ETH and the RTH session. Today is a phantastic example, as the target bands were exactly hit. It does not always match as well, of course. The first chart displays today's ETH range and prior averages (upper left) as well as today's RTH range and prior averages. Just noticed that the current day range also switched to Thursday, as the last bar is already Thursday's session, during night session a value of 0 is displayed fpor the RTH session.

(2) Floor pivots are based on yesterday's value zone and volatility. You can use a rolling pivots indicator over a 3-day-period and calculate range targets as well. The second chart displays the 3-day rolling pivots for ES.

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Fat Tails ideas are interesting. You can also look at Market Profile-Day types . There are some clues you can get from studying them.

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Thank-you for your responses.
The RTH ranges for the last few days are:
11.00
17.00
9.25
5.50
13.00
10.25
8.75
9.25
6.75
10.00
10.75

From your systems will tomorrow's range (Friday the 17) be a NR, MR, or WR?

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aquarian1 View Post
Thank-you for your responses.
The RTH ranges for the last few days are:
11.00
17.00
9.25
5.50
13.00
10.25
8.75
9.25
6.75
10.00
10.75

From your systems will tomorrow's range (Friday the 17) be a NR, MR, or WR?

This is not a system, just an indicator that calculates the average ranges of the last m and n days and uses them to display target bands. Sometimes these bands are reached, sometimes not. Volatility expectation depends on news and other factors.

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As Fat Tails stated, "Volatility expectation depends on news and other factors". Financial markets are efficient in the long term as the underlying trend and the laws of supply and demand always prevail. However, short and medium term inefficiencies in the market often arise due to "endogenous volatility." This is market volatility caused by the differing levels of optimism and pessimism regarding the future of the market.

Additionally, in any market you have short term participants and you have long term participants. This is the basis for Market Profile, which was alluded to by trendisyourfriend. Basically, short term traders and long term traders have different ideas of value. Therefore a short term trader may see value at the low end of a range day, where as a long term trader may not see the same value there. Identifying the range development for the day and knowing the previous days' value area can give you an edge in predicting future ranges.

In the case of the S&P which has poor trending properties due to the high amount of arbitrage and high frequency trading, 70% of all trading days retrace to their previous days average trading price. 88% of all trading days trade above their prior day's close, but only 54% actually close higher. 85% of market days trade below their previous day's close, but less than half close lower.

This is why mean reversion trading has become such a widespread and pervasive strategy. We must also realize that the 70% probability of mean reversion expands significantly when markets are losing volume and momentum (volatility). This fact is evident as a market moves toward a range extreme, and as volume and momentum dissipates, the market fails and reverts back to the mean of the range. In Market Profile terms, the market tests the upper or lower end of the value range and cannot facilitate trade at either of those levels, and then moves back to the POC.

That being said, any indicator that would be able to dynamically quantify or predict range extension probabilities, would have to include some measurement of volume and momentum (volatility). I would imagine that the NYSE TICK indicator and the Cumulative Tick Index would be helpful in providing that kind of feedback or some of GOMI’s indicators that measure volume at the bid/offer could be utilized in constructing such an indicator.

Bottom line is I have no real idea what I’m talking about, and I’m sure my friend Harry (Fat Tails) will concur and show me the foolishness of my ways, but I thought I’d take a shot.


Last edited by tigertrader; December 16th, 2010 at 11:32 PM.
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tigertrader View Post
As Fat Tails stated, "Volatility expectation depends on news and other factors". Financial markets are efficient in the long term as the underlying trend and the laws of supply and demand always prevail. However, short and medium term inefficiencies in the market often arise due to "endogenous volatility." This is market volatility caused by the differing levels of optimism and pessimism regarding the future of the market.

Additionally, in any market you have short term participants and you have long term participants. This is the basis for Market Profile, which was alluded to by trendisyourfriend. Basically, short term traders and long term traders have different ideas of value. Therefore a short term trader may see value at the low end of a range day, where as a long term trader may not see the same value there. Identifying the range development for the day and knowing the previous days' value area can give you an edge in predicting future ranges.

In the case of the S&P which has poor trending properties due to the high amount of arbitrage and high frequency trading, 70% of all trading days retrace to their previous days average trading price. 88% of all trading days trade above their prior day's close, but only 54% actually close higher. 85% of market days trade below their previous day's close, but less than half close lower.

This is why mean reversion trading has become such a widespread and pervasive strategy. We must also realize that the 70% probability of mean reversion expands significantly when markets are losing volume and momentum (volatility). This fact is evident as a market moves toward a range extreme, and as volume and momentum dissipates, the market fails and reverts back to the mean of the range. In Market Profile terms, the market tests the upper or lower end of the value range and cannot facilitate trade at either of those levels, and then moves back to the POC.

That being said, any indicator that would be able to dynamically quantify or predict range extension probabilities, would have to include some measurement of volume and momentum (volatility). I would imagine that the NYSE TICK indicator and the Cumulative Tick Index would be helpful in providing that kind of feedback or some of GOMI’s indicators that measure volume at the bid/offer could be utilized in constructing such an indicator.

Thanks for this excellent contribution!

@trendisyourfriend won't like it, but mean reversion strategies have come to dominate the market. This is simple to understand. As there are ever more participants in the market without fundamental conditions changed, price is simply jumping around before reverting back to value. If need this happens in a way to hurt or to trap a large number of market partipicants (for example via price spikes or a flash crash ).

I remember the expression "the other timeframe participation" from Jim Dalton's book "Mind over Markets". This is a market condition, when institutional players are participating in shifting value away from the current value area. If this happens, volume increases and it may result in a wide ranging double distribution day. It is obvious that this is the market condition, where mean reversion stops working.

But for most of the days there is no other timeframe participation, it is always the same market participants playing an eternal game, and it is their number limits the potential for range expansion. And that is what the Session Volatility Bands are for. Without the larger guys participating, the move is over, if everybody has taken a position, and price will revert back to value. The playing field has a limited size, as long as the other timeframe traders stay on the sidelines.

To measure the probability of range expansion early during the session, you would have to measure participation via relative volume or market breadth indicators. The probability for a trending day is increased, if yesterday was a balancing day (narrow pivot range or - for those using market profile - narrow value area with single distribution) and if there are important economic news expected for today.

Being able to predict range expansion days would come close to the holy grail of trading, as you would know whether to apply trendfollowing or mean reversion strategies. But some analysis may show that trendfollowing is a game for smaller timeframes (sub 5-minute), whereas mean reversion dominates the larger timeframes (< 15 minutes). After all, human behaviour is repetitive, as we all need lunch and want to take profits at some time of the day

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aquarian1 View Post
I am interested in a team effort to explore methodologies for determining when the ES RTH day's range will expand (or contract) for the following day (RTH). For reference a narrow day (ND) <12pts, medium day (MD)>12 and <15pts , wide day (WD) >15pts.

A number of possibilities come to mind:
  1. ATR > MA of RTH
  2. Change in range (Yest versus prior day)
  3. Frequency (e.g after 4ND in a row 3WD then 2MD)
  4. Sequencing (Inside day following MD where close is > 85% of day's range or <15% of days range)
etc.

If there are others who would also like to predict tomorrow's range at the end of the trading day then please let me know.

Thanks,

Hi Everyone!!!

Thank you for your replies. (I am new to the board and cannot seem to get the multi-quote to work so bear with me!).

Phase Change
Perhaps I should add to this is that from my experience, I realize that the ES will trade several days in a narrow range and then several in a wide range. So what I am really trying to predict is when the band will shift. If it is 7 days NR, 3 WR, 2 MR, and then repeat, then when it will shift from NR to WR is what I am after.

Clearly on any one day the best predictor of the next day's range is the prior days range. So today, Friday, has the highest probability that it will be like yesterday, Thursday. Yesterday was 12.25 and today would likely be roughly the same. So clearly I am not interested in the high probability estimate extrapolated from the recent prior days' ranges.


Quoting 
Tiger:This is not a system, just an indicator that calculates the average ranges of the last m and n days and uses them to display target bands. Sometimes these bands are reached, sometimes not. Volatility expectation depends on news and other factors.


What I am after is when will the band widen?
e.g. next Tuesday 21 December to >15pts - just making that up!
--------------------

  1. I first want to find out if there are others who are interested in predicting when the range will expand or contract. So if others are not then its a no go. I see value in this but if other traders do not then there is not enough energy to carry the team project forward to a useful conclusion that justifies the time expenditure.
  2. As a personal prejudice I see little value in complicated stats of what has been. (see footnote below).
  3. I would like members of the team to be open-minded to new ideas and approaches and the beginning of the project. That is, to not form judgments, or suggests problems with ideas brought forward at the beginning of the project. (Reducing ideas to a workable number would come later - if required).
I, personally, do not have the time or interest for a discussion that does not lead to a product. So what I am looking for at this time is people to simply declare:
"Yes I am interested and I will contribute!"

OR

If the project definition is unclear or they have other questions that must be answered before they can decide if they would like to participate or not ask those either here or email me.

This project - if it starts - if for the benefit of all.

Once again - thank you all.

-------------------------------------------------------(footnote on complicated stats etc. --------------------
After showing a friend of mine (let's call him Shawn) what I had been working on in day trading, he asked me: why don't you just use a computer to program a strategy? (Shawn is a computer systems consultant). Having invested and traded for many years a dozens replies flashed trough my mind.

Most people who have not thought about and studied the markets are like Shawn.
Dump it all in the computer.
If the answer isn't complex with lots of stats it doesn't satisfy my ego.
Professors and "experts" have all the answers.

For people who know investment history the story of Long Term Capital asset management answers these points. For people who don't common sense would.

Huge fund companies have:
Teams of very bright people,
Enough computer resources, past data, statistics and programmers to choke a horse,
Enormous pools of capital to absorb great drawdowns.
Enough money to hire the very best statisticians, MBAs, CFAs etc.

With even 0.25% per day return with compounding of capital, they would end up "owning the world" and they don't so they don't have even that. So conventional thinking + statistics + computers isn't where the answer lies.

The small investor with limited capital and limited time and without a team of support staff must turn aside from conventional thinking to achieve what they cannot. )

-----end of footnote -------------------------------------------


Quoting 
personal note:
I am a private investor with limited capital who has been working on a set of systems for daytrading the ES for two years. (This is my only occupation, self-employed, and I am not in the investment industry.) I have my Honors Commerce degree with a specialization in Portfolio Finance. I have taken advance statistic courses - and understand their limitations. I have studied and invested in stocks for many years and love the field. (I was even a broker for a while many years ago.)



Last edited by aquarian1; December 17th, 2010 at 01:28 PM. Reason: typos
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Add on:

Now that I have further clarified the proposed project please do not contribute comments like:

"It can't be done, and here is why...."

This is very important.

You will add nothing useful and you will deter those who may have contributed from contributing. (They may think well is so and so says it can't be done and his reasons sound very educated I guess my idea won't work.)

thanks.

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trendisyourfriend View Post
Fat Tails ideas are interesting. You can also look at Market Profile-Day types . There are some clues you can get from studying them.

Thank-you TIYF,

I have visited the page and will explore it further on the weekend. Thank-you for your contribution.

Are you experienced with the MP day types and do you find them successful in your trading?
Have you experimented with other sequencing? e.g. using yest MP as the initial balance in a weekly MP perhaps combined with yest close in the current weeks trading range?

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