Effect of automated trading on Markets

[duard]

Adapted from "Sentimentrader.com"

40 years of history where breadth flip-flopped every day for at least 8 consecutive days.

8 Days of Breadth Flip-Flops

Date
03/14/90
03/17/95
12/07/00
02/22/02
10/28/02

It’s interesting to note that out of 40+ years of history, all occurrences were in the past 15 years – perhaps a nod to the increasing role of hedge funds and black-box style automatic trading.

Can you say reversion to the mean?

 

[stephencrowley]

Why is 8 days meaningful? Why not 7, or 9?

 

[duard]

Quote from stephencrowley:

Why is 8 days meaningful? Why not 7, or 9?

That was the number of days back and forth during the consolidation end of April 05 in the indexes. 8 is significant insofar as there are only 5 other days in 40+ yrs of data with that type of reversion to the mean.

This type of trading has really been problematic for many traders in the past few years and is suggestive of the dominant strategy in the marketplace TODAY. Markets change and thus strategies must be altered. Right now thee strategy which appears to work is swing trading sometimes daily.

Good Luck

 

[stephencrowley]

Gotcha. I guess my point was, while 5 instances in 40 years is significant, if there were 500 instances of 7 then it would be less so.

I think these sort of things can be too blunt of a tool. What about a day that is only 1 point positive? It could have just as easily been a negative day and not counted due to a few small trades near the end of day.

Just my 2 cents.

Quote from duard:

That was the number of days back and forth during the consolidation end of April 05 in the indexes. 8 is significant insofar as there are only 5 other days in 40+ yrs of data with that type of reversion to the mean.

 

[duard]

Agreed. Statistics can be massaged to support any viewpoint. But it is an observation. There appears to be alot of reversion to the mean strategies being implemented at present. Seems alot of traders incuding Hedgies, institutional, and privates are having a tough time turning out profits with the back and forth.

Good luck.

 

[John Merchant]

The joy of scalping is that there is always a trend in SOME timeframe. The only question is "How LOW, can you GO?".

 

[yeayo]

Rage against the Machines!!!

There no good. They revert everything to the mean. Kill every trend before it even starts. Ban them!!

 

[Steelhead]

Quote from yeayo:

Rage against the Machines!!!

There no good. They revert everything to the mean. Kill every trend before it even starts. Ban them!!

no doubt! even the people who build these machines must get sick of the low volatility they cause.... sheesh look at the nazcrap
what a lame market

 

[yeayo]

Yeah you figure post 911, and with all these hedge funds that markets would be as volitile as ever...but no the mean revert bots have prevented that. Think about that, we've had terror attacks, wars, and so much economic/politacal instability yet volitility is at a 20 year low!!! You know why? Cause every bot trader and his quant guru believes in that mythical 'edge' that they feel only a bot can deliver.

 

[Trader5287]

It's unbelievable in certain futures markets in Asia and Europe.

Marketmaking is totally automated at certain times. As I write this, the DAX and Paris CAC-40 are on autopilot.

Geo.