Current Day's Open Position

[trhudson]

I have found an lot of value in determining market direction when looking at the Open in Relation to the Previous Day's Range. I previously asked a question about the Previous Day's Close and it's predictability on the following day's market direction.

I plan to publish some vague but informative research on how these price points can help to determine which side of the market you would want to be on, if you are an intra-day position (not scalper) style trader.

 

[trhudson]

Regardless of the previous Day's Price Pattern, if a stock opens in the upper 50% of the previous day's range, what's the probability of the following events:

A new high above the previous day's high will be made during the day.

A new low below the previous day's low will be made during the day.

 

[Zr1Trader]

53% new highs,

47% new lows

Just an estimate, never quantified it.

This will be interesting.

 

[trhudson]

Quote from Zr1Trader:


This will be interesting.

I am certain it will be.

You did not account for inside days.

There will be outside days as well.

 

[Zr1Trader]

revised

I would guess that this would be dependent on the instrument too. Some forex pairs trend more often. Where as other instraments/pairs revert to mean more often.

Guess...

40% chance there are new highs
25% chance there is an inside day
15% Chance there is an outside day
20% Chance there are new lows

 

[trhudson]

Quote from Zr1Trader:



I would guess that this would be dependent on the instrument too. Some forex pairs trend more often. Where as other instraments/pairs revert to mean more often.

I will agree that it's certainly going to vary among instruments, but how much?

What is surprising, in my view is that the SPY is mean reverting and AAPL is not (on an intra-day basis), yet if you compare the results you would certainly be surprised that AAPL actually creates a Higher High less often on a % basis over time.

I have not done any research on Forex, so I will not provide any results there, as I do not have the data. If I get the data, I will certainly do the analysis, it only takes a few seconds.

The research I do is all on individual stocks and ETFs.

 

[trhudson]

Quote from Zr1Trader:

revised

I would guess that this would be dependent on the instrument too. Some forex pairs trend more often. Where as other instraments/pairs revert to mean more often.

Guess...

40% chance there are new highs
25% chance there is an inside day
15% Chance there is an outside day
20% Chance there are new lows

The numbers are going to add up to greater than 100%. If you have an outside day, that day will be counted twice - as both a new high and a new low.

Inside day is typically in the neighborhood of 17-20%
Outside day is typically in the neighborhood of 7-10%

 

[trhudson]

The purposes of this post :

1. To demonstrate that market-based tendencies are different than individual stocks.

2. While I am not suggesting that it is a bad practice to implement a stop-loss below the previous day's low or above the previous day's high for swing traders...I am suggesting that this is often a bet on where the market / stock will open the following day.

3. To demonstrate that there is a logical reason as to why these price points are often 'taken out'.

4. To show that many stocks, while they may trend well on an intra-day basis, they are mean reverting on a daily basis.

5. To show that a bigger picture of the data shows that daily prices can act as filters to increase probabilities for intra-day trading.

 

[trhudson]

For the SPY:

Open Upper 50% / Higher High = 65%
Open Upper 50% / Lower Low = 26%

The logical reason as to why this occurs = THAT'S WHERE THE STOPS ARE PLACED.

 

[Zr1Trader]

Quote from trhudson:

For the SPY:

Open Upper 50% / Higher High = 65%
Open Upper 50% / Lower Low = 26%

The logical reason as to why this occurs = THAT'S WHERE THE STOPS ARE PLACED.

This makes sense, the way I understand why this makes sense is because market exists to fill the most orders it can. Just like a grocery store exists to fill the most orders it can between buyer and seller. So the market is more likely to go where the closest and most liquidity is?

Thanks for the interesting stats .