How would you make money off this information.

[frostengine]

Lets assume that for the ES 1 minute time frame. You could tell with 83% accuracy whether the next bar will be either up or down.

However, for only 20% of the bars you have a prediction.. but those 20% that you do step up to the plate and make a prediction you'll be right 83% of the time...The rest of the time you make no prediction at all.

What types of strategies would you implore to make money off of this information?

I would assume simply buying if its suppose to be up next bar or selling.. etc.. but I think slippage and spread will get you on this small timeframe.

 

[jmoo]

The first obvious question is how do you know when your at the 83% level to predict the next move? How often does it happen?

 

[frostengine]

It happens 20% of the time... so if your looking at every 1 minute bar from 8;30 central till 3;00 central. when the regular market closes..... 20% of the bars you will make a prediction about... and of those 20% bars you make a prediction on you will be right about what direction you said 83% of the time....

An easier way to think about it is.. to consider about once every 5 minutes you will make a prediction about what the next 1 minute price bar is going to do. When you do make this prediction you are right 83% of the time.

 

[RhinoTrader]

Hi Frost

I'm sure you know that a simple % chance of a direction next bar is not enough to form a strategy (altho it's a good start). Other considerations include:

1) Slippage (as you have already said - esp as you say on a small timeframe, not because liquidity is not there but because you'll be buying the offer and selling the bid much of the time)
2) Avg size of move when u are right, vs avg size when you are wrong - 80% may not be high enough if the losers are much bigger than winners
3) Max adverse excursion even when you are right - i.e. how far market moves against you before turning into a winner - has a big effect on stop placement. This may not be a huge factor when only holding for 1 min but if you were planning on placing the stop at the low of the last 1 min bar or similar, will make a big difference

Good luck with your efforts

 

[nutmeg]

I would explore the Pareto principle and focus on money management.

 

[roffo]

Quote from frostengine:

Lets assume that for the ES 1 minute time frame. You could tell with 83% accuracy whether the next bar will be either up or down.

However, for only 20% of the bars you have a prediction.. but those 20% that you do step up to the plate and make a prediction you'll be right 83% of the time...The rest of the time you make no prediction at all.

What types of strategies would you implore to make money off of this information?

I would assume simply buying if its suppose to be up next bar or selling.. etc.. but I think slippage and spread will get you on this small timeframe.

This one has 90% accuracy:
trading-software-for-online-investors.blogspot.com/
And has a system to keep the 10% losers small.

 

[MichaelJ]

Do the 20% of predictable periods comprise trend continuation or reversal?

If reversal, then it's "easy". In other words, it is 12:01, the last 1 minute bar (or however you measure the trend) has been UP and we have a prediction (correct 83% of the time) that the next bar (closing at 12:02) will be DOWN. Then start selling on the offer - the recent upward momentum should get you filled. Then look to buy on bid in 1 minute.

If continuation, it is harder because to take advantage of this information you have to get positioned in the direction of the trend, and slippage might eat up all your profits.

You have to be careful here with "too good to be true" situations. Years ago I developed a short-term system based on the S&P that looked fantastic until I realized that the executed prices and the screen prices were very different.

Quote from frostengine:

It happens 20% of the time... so if your looking at every 1 minute bar from 8;30 central till 3;00 central. when the regular market closes..... 20% of the bars you will make a prediction about... and of those 20% bars you make a prediction on you will be right about what direction you said 83% of the time....

An easier way to think about it is.. to consider about once every 5 minutes you will make a prediction about what the next 1 minute price bar is going to do. When you do make this prediction you are right 83% of the time.