Trading: Choppiest environment in 50 years !

This is a discussion on Trading: Choppiest environment in 50 years ! within the General Trading Chat forums, part of the Reception category; True. Brett Steenbarger had a good piece on the current chopchop too: "Short-Term Reversal Patterns Among Global Equity Indexes A ...

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Old Aug 26, 2008, 4:43pm   #15
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BSD started this thread True.

Brett Steenbarger had a good piece on the current chopchop too:

"Short-Term Reversal Patterns Among Global Equity Indexes

A number of traders have commented to me on how choppy the market conditions have become. A strong movement seems under way, and then it just as strongly reverses.

As a way of looking simply at recent trading conditions, I went back to the start of 2007 and investigated three-day returns as a function of the prior three-day returns. Specifically, I looked at what happens when the market is up jointly on a one- and three-day basis (uptrending) and when it is down jointly on a one- and three-day basis (downtrending).

When the S&P 500 Index (SPY) has been up for the past one and three days, the next three days average a loss of -.30% (80 occasions up, 83 down). When SPY has been down for the past one and three days, the next three days average a gain of .22% (82 up, 51 down). If traders wait several days for a trend to assert itself and then jump on board, they are likely to start in the hole.

When we look internationally at the Europe, Australasia, and Far East (EAFE) stocks (EFA), when those are up on a one- and three-day basis, the next three days average a loss of -.27% (76 occasions up, 80 down). When EFA has been down over the last one and three days, the next three days have averaged a gain of .09% (74 up, 65 down).

Finally, when we examine emerging market stocks (EEM), we find that when they are up on a one- and three-day basis, the next three sessions average a loss of -.31% (86 up, 81 down). When EEM has been down over the last one and three days, the next three days have averaged a gain of .69% (79 up, 45 down).

Across the globe, short-term trend following has been hazardous for traders' wealth. Even longer-term traders need to take these reversal patterns into account, if only to size positions and set stops for expected heat."


LINK:
TraderFeed: Short-Term Reversal Patterns Among Global Equity Indexes
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Old Aug 26, 2008, 4:54pm   #16
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BSD started this thread And from a commenter on Steenbargers page from my last post:

"Anyone Feel Like They Are Flipping A Coin, When Trading This Market?

by Woodshedder on August 25th, 2008 at 1:00 am

I want to introduce to all of you a statistical measure which has come to have a significant influence on the trading systems I am developing. Ralph Vince describes the measure very well in his book Portfolio Management Formulas. This measure is called the Z-Score, or the Runs Test.

I want to skip most of the statistical jargon and get right to the meat of the issue, but I will be happy to answer specifics in the comment section.

To understand why the Z Score or Runs Test is important, we need to digest Rob Hanna’s statement from his recent post How to Trade the Choppiest Environment in 50 Years. Rob writes, “As you can see, buying after strong days and selling after weak ones worked well for 40 years. In 2000 that changed, and the last year and a half is the worst it has ever been with regards to follow through. This would suggest that strategies that may have worked well for forty years or more could be suffering greatly now.”

Also, it is important to read Dr. Brett Steenbarger’s recent post Short-Term Reversal Patterns Among Global Equity Indexes.

Both authors conclude that short-term trend following is not working very well. We can test their conclusion by applying the Z-Score to the data from the indices. I should mention that both Bhh from IBDIndex and Damian from Skill Analytics have been instrumental in helping me flesh out the rest of the ideas presented below.

The Z-Score can determine whether wins or losses are dependent on previous wins or losses. Think of dependency in this way: Do wins begat more wins? Do losses begat losses? If so, this relationship would be described as a positive dependency. What if wins begat losers, and losers begat wins? This would be a negative dependency.

While Z-Score has traditionally been used to analyze the win and loss streaks of a trading systems, it seems that another application for the measure may be to analyze the win and loss streaks of the indices in order to determine whether there is any dependency. Are the sequences of wins and losses containing more or less streaks (of wins and losses) than would be expected in a truly random sequence? When digesting this, consider the fair coin, where one flip is equally as likely to be heads as it is tails. We want to determine if the indexes are trading as a fair coin, or one that is biased to heads or tails, or both.

Below are the Z-Scores for the S&P 500 (SPX), using all data available from yahoo, which goes back to 1950. In January of 1993, the S&P 500 SPDRs was introduced. I will quit using SPX data and use SPY data from 1993 forward.

All Data, 1950 to Present: Z-Score -9.359014

This negative Z-Score implies a positive dependency at a confidence level of much higher than 99.73%. In short, a positive close on the S&P 500 generally begat more positive closes, and losing days generally begat more losing days, over this broad time span.

1960 to Present: -7.196132

1970 to Present: -3.795268

Note that the positive dependency is decreasing, yet from 1970-Present, the confidence level is still above 99.73%.

1980 to Present: Z-Score .3465443

1990 to Present: Z-Score 1.692151

1993 to Present (With SPY Data): Z-Score 2.115444

Note that there has been a switch. The positive Z-Score implies a negative dependency, where buying begats selling, and selling begats buying. Be careful though with this data, as the score must be above 1.64 to have a confidence level of greater than 90%.

2000 to Present: Z-Score 1.3608623

2003 to Present: Z-Score 1.1696094

2006 to Present: Z-Score .4530397

2007 to Present: Z-Score 1.3030246

October 2007 to Present: Z-Score .3994188

Note that from 2000 on, the Z-Scores move lower. The highest score from this period, 1.303, gives a little better than an 80% confidence level. I interpret this data to mean that the S&P 500 is basically moving through a random walk, although the confidence level is not high enough to draw any firm conclusions.

January 2008 to Present: Z-Score -0.628093

February 2008 to Present: Z-Score -0.400456

March 2008 to Present: Z-Score -0.246511

April 2008 to Present: Z-Score -0.403907

May 2008 to Present: Z-Score -0.288564

June 2008 to Present: Z-Score 0.0022265

July 2008 to Present: Z-Score -0.09631

From January 2008 to the present, we begin to once again see negative Z-Scores. A negative score implies a positive dependency, where selling begats selling and buying begats buying. The scores are not significant enough to exhibit a high level of confidence.


Conclusions
The recent data show no definitive dependency, either positive or negative. This means that buying because the market has closed up or selling because it has gone down has not been working as well as in the past. Also, buying weakness or selling strength, in order to catch a reversal, has not been working as well either.



Right now, betting on the market, as represented through the SPY, is similar to betting on the flip of a fair coin. This data, while it may not prove the conclusion of Hanna and Steenbarger, certainly does not disprove it."


LINK:
Technical Analysis at iBankCoin.com
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Old Aug 26, 2008, 4:57pm   #17
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So trade it through options. 25d riskies delta hedged maybe? And you hopefully get to lean on a nice axe into the process.

Thoughts? Am I being an idiot? If the relationship Steenbarger saw is really that consistent there's always a way to play the edge. If I were starting out on my own now I'd be looking at end of day type data mining and would probably combine trading spot fx with trading binaries and vanilla options. But I'm not

GJ
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Old Aug 26, 2008, 5:07pm   #18
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BSD started this thread Sounds sensible and is definitely sthg that should work quite well, just afraid that I'd need to hire some quants to get that kind of stuff up and running.

;-)

But what also works is just going down to a lower time frame, eg EUR/USD has had some picture book perfect trends as per Technical Analysis 101 today on a 1 minute chart, first a classic shake-out promptly followed by a charming fake-out, but that initial twitchiness was then followed quite decently by a downtrend of lower lows / lower highs, again followed in the afternoon by the reverse at ca 14:00 CET, quite doable provided one doesn't get greedy or stubborn or fall in love with one direction and start wishing for things that aren't there.

In this market you know even less than usually whats going to happen next, but provided one doesn't mind being stopped out a bit and quite regularly at that, but manages to hang on to a trend when you do get one, is quite doable.

Thing I always have to remember is that doing this type of trading you're not looking to make money every day or even every week, but you still have to keep trading to catch those opportunities that do present themselves and that then more than make up for the losses.

But for anyone struggling, either do what GJ says which makes sense, or scroll all the way down to tick or 1 minute charts.
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Last edited by BSD; Aug 26, 2008 at 5:14pm.
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Old Aug 26, 2008, 5:15pm   #19
 
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My opinion is that too many people trade and the law of large numbers applies very short-term. The random moves are due to long and shorts split equally in half. This will change when one side drops out broke and the other prevails. Then you get momentum that feeds itself.

Sorry to be so simplistic but I do not need backtests to figure out that 20 year old chaps with fast computers around the world try to become rich trading.

The answer is there are too many players using sophisticated tools. Just wait a few months. Smart money will come in after things calm down.

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Old Aug 27, 2008, 8:26am   #20
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Originally Posted by BSD View Post
Sounds sensible and is definitely sthg that should work quite well, just afraid that I'd need to hire some quants to get that kind of stuff up and running.

;-)
Really? I would have thought just get yourself a bloomberg or maybe a bank's pricer if you're not feeling so flush. There's probably even a decent free package out there that can do most of what you'd need I'd guess.

GJ
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Old Aug 27, 2008, 10:21am   #21
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BSD started this thread GJ, I suppose I'm just a big friend of KISS, of keeping it as simple as possible while still getting the desired results.

I think in a way that simple charting - or tape reading as say Livermore called it, only difference being ones depiction of price was numerical while mine is visual - has the advantage that it basically always has and always will work on a net profitable basis as long as there is sufficient movement in markets.

And, on top of that, it's an area where I think you don't have all that much competition, I'd presume that these days not all but definitely most hedge funds for example use some form of data mined correlations and computer driven models they base their trading on.

Another detriment down that road is that you'd be competing with them in an area where their success is already diminishing as too many of them are all doing the same thing largely, and at the same time, and in the same markets.

I think Renaissance Technologies, who definitely showed that mathematical computer driven models can be very successful, started a real catch-me-if-you-can race in the latest big thing, but as always too much competition offering the same gizmo is not good for business.

Finally, those people may exist, but on all these mechanical systems sites like wealthlab or tradestation etc etc, when I was starting out fishing for answers there, I have never seen or heard of a programmer who was able to get a programme to do the same very simple stuff I do visually on a chart...

It was always, well, patterns may look easy, but easy to programme they are not.

So using simple price patterns that worked a hundred years ago and still work today would seem to be an advantage I believe.

But then I must admit that it is years ago that I went looking for answers there.

Are you and your group mainly mining data for inter / intra market relationships etc and using mathematical models in your proprietary trading ?

Or do you also have people just doing basic charting ?
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