High Low Bar Count with Trend Continuation and Reversal Statistics

In this study we are trying to work out it, after a run up or down in a stocks share price, what is the probability of a reversal or trend continuation, and if there is an opportunity, how much will the share price reverse or continue in its trend.

Is the share price movement random? Can a trader expect for the trend to continue? So to add to this contribution I thought it prudent to see if there is any value in, and what is the statistics and probability of, a continuation of a trend or the reversal of a trend.  We will look at each bar in reference to its previous bar and see where there is opportunity if any.

This concept, idea or thought is not a new one. Rather it is as old as the hills. The point of the article is to put it in a clear format so a trader can provide context around their next trade. If the stock has moved up, say 4 days, the reader will know what the probability is for the trend to continue and by how much. Knowing this provides the trader and investor a realistic share price target. We all know each stock is different and this concept provides some sort of structure to when to take profits or when to wait on the side lines.

We will look through history with the stock price. There are some problems with this in that the volatility of the stock can change through time. So to help reduce that difference, we have provided a min movement figure and the idea is that this will capture even the movement when the volatility is low.

We also need to create and turn it from theory into a trad-able point of view. Information on how much money can be made and what is the probability of the investor making an amount of money.

To begin with we will look at higher highs or higher lows with a holding period of 10 days. What this means is that when the stock is moving higher with higher highs or higher lows from the signal date. From the Signal date, we will study the next 10 days to find the highest high and the lowest low for our analysis. The signal date we use is the high price of the signal date, to the highest high in that 10 day period to find out the statistics on a trend continuation and for a trend reversal we use the low of the signal day, and then find the lowest low within that next 10 day holding period. There is no logical use for a 10 day period nor optimization used for the holding period, it just gives the stock an amount of time to move.

Whilst there are times in history where the stock has run up with a greater number of higher high or higher lows we have selected the run up based on where in history the occurrences were greater than 10. To give perspective if you have say 9 higher highs or higher low consecutive bars there will be less times in history that occurred. Whereas a bar count of 4 is a lot more common. So to make it trade-able we need a high amount of occurrences and also it will provide more accurate statistics as we are dealing with a large number of occurrences. For statistics we need a high number of occurrences to provide some sort forward guidance.

Symbol	Bar Count	Occurrences	Stat Trend Continue(%)	Min Mov(%)	Avg Mov(%)	Stat Trend Reverse(%)	Min Mov(%)	Avg Mov(%)
AAPL	4	170	59.7633	0.0790	5.5000	98.2249	0.0170	7.9000
EWA	5	62	57.3770	0.1000	2	100	0.0980	3.3000
BA	6	74	54.7945	0.1300	3.3000	100	0.0300	4
TLT	8	20	68.4211	0.3500	2.3000	100	0.0670	1.8000
TSLA	5	22	52.3810	0.5500	5.6000	100	0.2900	9.2000
SPY	5	92	65.9341	0.0920	1.2000	100	0.0890	2.4000

Systematically going through the data above the reader can observe that using the one date we can identify that these different stocks have different bar counts. This means that currently AAPL has a 4 day count where it has higher highs or higher lows. With AAPL looking over the history of the stock this 4 bar count has occurred 170 times. Reading along that same line the reader can note that for AAPL there is a 59% probability of the trend continuing.  To clarify, as we are looking at the next 10 days after the signal date (which is a 4 bar count) the trend continued in some sort amount 59%. Excluding negative numbers the min return is 0.079%. To put figure in perspective and based on the day or writing this article the share price high was $119.43, there is a 59% probability that the share price will move a MIN amount of 0.079% to $119.52 over the next 10 days. The Average move after a 4 bar count is 5.5%. To put that into perspective, there is 59% probability that the Average share price will move from $119.43 to $125.99 over the next 10 days.

Moving along the same data we come to Stat Trend Reverse for AAPL of 98%. This means that over the last 170 occurrences that AAPL had a reversal within 10 days from a 4 bar count. The MIN movement for AAPL for a reversal was 0.017% making the reversal from the low of today’s data which is $117.94 to the MIN historical low price movement to $117.92. The average movement coming in at a low of 7.9% or $108.62.

So to really capitalize on this concept further the trader can look for stocks where there is a high probability of reversal or trend continue, and also look for stocks with a High Min share price movement.

Depending on the traders style of investing this is all interesting data. One of the take always is that based on the data output as the bar occurrences increase, the probability of the trend continuing, on average, decreases. This is nothing new every trader/investor knows this. But the point of the article is to provide context and provide a tradable opportunity. The higher the bar counts the higher probability that the stock will see some sort of pullback within 10 days. This pullback probability increases to 100% quite quickly. What it clearly shows is that there is opportunity for gains using the correct trading methods. 

Superannuation Debunked. It’s time to take accountability for our own investment choices.

Superannuation Debunked. It’s time to take accountability for our own investment choices.

Superannuation is a topic that needs to be debunked. I have put together this short document with some observations;

I have noticed throughout the years that people are misconceived and have the “OLD” school mentality about investments and their superannuation. We are now in the 21^st century and technology has made it for retail consumers to easily manage their own superannuation account as well as to outperform their current superannuation provider with having some market awareness.

The Superannuation fund management businesses, are still based on OLD school mentality, it’s over. People are too intelligent and have access to a lot of resources these days. Consumers can easily manage their own superannuation or investment money, and be better off for it.

If you want to put in a little effort, you can easily double the returns and half the risk (draw-down, or risk of crash e.g. 2008) provided by your superannuation provider. Read through my articles and you will quickly realize how this can be achieved.

To go through this methodically we need to start by looking at a couple of popular superannuation providers;

SuperRatings have noted that ANZ is the cheapest super account and just selected Australian Super as a random popular account.

• Macquarie note in their Fees and costs table the following: “The investment fees range from 0% to 10.25% per annum of each managed investments asset value”. How is this possible and how can they get away with that?
• They all have noted additional fees may apply. Meaning there are extra fees you are being changed and they don’t need to show you.
• The calculations of returns are subjective, it depends if the fund uses average returns or Annualized returns.
• Note: The figures are complicated and I noticed depending on where on the various websites you were depends on the figures they provide. It might all make sense but if I cannot work it out in a relatively short period of time, what chance does most of the population have?

When looking at the graph above, we can see that ANZ has only 3 years of data. There are various reasons for this, but the main reason is that they have made the ANZ Smart Choice available for only 3 years. Fund managers do this and change names of products if the track record is not that great. This way there is no long term track record and they accumulate FUM quickly because of high perceived returns. You can see that Australian Super has 10 years of data. But their returns are basically 1.5% lower than if a SMSF just went out and bought the SPY ETF and did nothing.

Why? Well the way it works is this, SPY exchange traded fund is a low cost ETF that is exchange traded. Meaning it’s available for people to buy and sell stock on the share market. SPY holds all the top US stocks, so any superannuation fund that holds US stocks will hold the same stocks as the SPY. The only difference is that your super fund has to charge you a fee to make money. So you the consumer get the same holdings as the SPY minus the Super fund costs.

This is why most of the time your super fund will UNDER perform the direct market ETF.

To take this a step further, most big ETFs are liquid. This means that your SMSF can easily buy and sell when you wish. For a managed superannuation fund this is harder to do, as you need to go through your super fund, and they in turn then buy and sell on the market, and then as you can see in ANZ case, will charge you 0.40% to do this. Whilst you do get charged brokerage it is substantially lower than that percentage, its instant and you’re in full control.

So what’s all the fuss about?

1. There is a lot about superannuation in its current format that most people are not aware. I don’t blame this on the superannuation firms but rather the lack of quality education from our school years to retirement. All education is skewed to what the educator agenda is, which most of the time is commercial.
2. The ongoing fees have a major burden to your personal long term value of your fund and hence you will have a smaller balance in retirement.
3. Within Superannuation you lose control of your investments and their returns. There are simple methods that can be used that will reduce your draw-down losses (like 2008-2009) and provide you a higher return. See my other blogs writings
4. Getting someone else to manage your money means you can blame someone else for your poor returns. Why blame someone else? Take control of your own future!

Comparisons

Using an online fee calculator with $50,000 initial investment and the annual fees set at 0.89 (This is the average of 1% - the annual cost of the SPY), over a 30 year time frame with no other contributions there is a difference of $90,000 in fees based on a 7% return p.a. This means instead of your superannuation account being $380,000 it will be $290,000. This is because of the fees that your superannuation fund charges.

So now what if you could manage your own superannuation or investments, and what if you could consistently get 15% per annum from your investments? Over 30 years the end value would be $3M not including taxes. What a massive difference.

The whole point of all this is education. With some work, Education and commitment, anyone can put aside some time and remain in their current job and also build a nest egg for their retirement.

In some cases you may not have the time to gain this education and to implement the investment strategies. To get someone who is active in the markets to invest for you is a valuable exercise if the manager knows how to outperform consistently the market. Most managers charge 2%, the reality is if they can NET you 15% PA in the hand with that manager, the outcome is very significant. You can clearly see the difference in outcome in the calculation above.

Every business needs to make money, i get that and that is not the point i am trying to get across. My point is be aware of which business takes your money and charges you a fee, and which business charges you a fee but makes you money. You may easily be able to manage it yourself, or you can find someone who charges a bit more but significantly outperforms, this in turn will give you a significant better return over the long term.

My point is; it’s not the manager’s fee, its the impact that fee is having on your financial future. You can easily outperform the super fund by self managing. Find the time to complete the work yourself or finding a manager who can consistently outperform the market returns. It’s not hard; it just needs to be done.

Calculator used is from: http://www.buyupside.com/calculators/feesdec07.htm

EWW the Mexican ETF -- Market sees more risk -- I see less risk

EWW the Mexican ETF

With the Trump factor and normally how the stock market over reacts to events I thought now would be a good time to do some analysis on the EWW the Mexican exchange traded fund (ETF) and see what evidence we can put together to see if it’s a buying opportunity.

Market sees more risk, I see less risk…

As per norm we will go through it systematically to look for opportunities.

When we look at the stock chart we can see that EWW is currently at its 52 week low. In all time perspective from the lowest low to the highest high $41 it is currently sitting just above the 50% draw-down mark (The stock is currently very close to this 50% mark). This does not mean too much but just perspective on where the stock has come from.

52 week low chart

 Historical chart perspective

When we look at the up day down day count we can see that over the history of the EWW stock the all-time historical average is 1.01 this means it basically goes up as much as it goes down. The Mexican ETF does not have much of an upward drift. To reference it the SPY (American Market has a historical average of 1.13 which obviously shows an upward drift over time). The 365 day average for EWW is 0.95, this means it is currently below its average and over the last 365 days it has had more down days then up days. 

Over time we can expect this to revert to its average of 1.01. This cannot happen in one sweep, but will take time.

The takeaway is that currently the EWW (Mexican) ETF needs to have more up days then down days to get back to its norm.

The next step is the pain index. This means how much draw-down (pain) can we expect EWW to take on based on historical data. The pain index shows that EWW has a draw-down pain of about 15%, with the Max draw down of 64%. The current Draw-down is 39% meaning we are currently double the original pain index. This means that using the all-time high we know that the historical max draw-down based on historical data would be $27. This is good to know where the stock has been and its average pain. We are currently double the pain value so that should be telling you something.

If we look at the last 365 days the current draw-down is 24%, with a 98.71% probability of rising. Over the last 17 years of data, only 57 occurrences out of 4424 occurrences showed a pullback of more than 24%.

When we look at the current pull back EWW is experiencing we can note that based on the current share price where it is, and historical data, if we sold an put option at $41 there is a 60% probability of NOT being exercised with December expiration.

This is different than the Volatility Option value but both are closely related. Using historical data looks at every day in history whereas option valuing is based on the share price as it currently stands and not where it has been. This is just based on IV and current share price. The option is a faster way of calculating the future risks, but in my opinion is limited.

EWW current Option Implied Volatility value

Looking at option Volatility we can see that the option volatility, that is the IV Rank, is close to 100%. We can clearly see from the chart (blue line) that the IV is at the higher part of the range then the previous year. This means that the options value has increased as the market sees that the risk for EWW has increased. 

Using a High option IV means we can make greater profits with the same amount of capital if we traded options. Using 30 delta options we can expect about a price of about $1.14 per option contract with the expiry in December and strike price of $41. The return on capital is about 11% for the 1 month.

Take away. 

Option volatility is at highs making option premium rich. The current Draw-down of the stock is 2 times the pain index of the stock. The stock up day down day count is below average meaning the stock needs more up days then down days in the future to get back to norm. And lastly the $41 option is another 5% fall from where the current share price is.

Yes Trump can do all sorts of things, but they are all unknowns. What we do know is the data provided here, the probabilities and statistics.

This by no means is a recommendation and an investor should trade small.

I am not a licensed Investment Adviser and DO NOT provide financial Advice. Everything contained on Face book, twitter and linked websites, has been written for the purpose of providing investment techniques. The material neither purports to be, nor is it intended to be, advise to trade or to invest in any financial instrument. I Expressly disclaim all and any liability to any person, with respect of anything, and of the consequence of anything, done or omitted to be done by any such person in reliance upon the whole or any part of the material.

Investing for Long Term Security

Part 1

The most important item if you plan to invest, is to be a good steward of the gifts you are provided and invest wisely. If you are investing into any asset class, and decisions are based on this core fundamental and underlying basis, your investing will be secure and investing rewards will follow closely. Without following this reasoning, investing into property or shares turns into gambling and a un-needed leveraging of ones finances to a point where a minor market correction will create un-calculable losses.

So how do you create long term Security within your investing portfolio?

Hard work. Investing is like any other job. You work hard and smart and you get the reward. With your day job you work hard and your boss may or may not give you a pay rise or a bonus. The bottom line is the harder and smarter you work, it will increase your probability of getting a higher wage or bonus. Same with investing you work hard and the market may or may  not give you a profit. If you put in very little time to trading and investing you can only expect returns proportional to your input, and in most cases you will lose money. Trading and investing is a job. Viewed any other way your outcome and returns will reflect your input.

Firstly stop reading anything that is promotional and advertising based, be it on the internet or through papers, TV, radio etc. 99.9% of what you will read or hear about trading and investing will have an ulterior motive. In most cases it is a business pushing their own secrets, ideas, indicators, black box, programs etc. The normal story is "I have made my millions using this exact system and now, out of the love for society and humanity I am spreading the word and helping you the individual to also create untold wealth and cash flow and live happily thereafter. Just pay a small fee of 200$ and my secret will be shown you with ongoing day to day training provided etc. etc.". If someone is sharing anything with you that is not mathematically possible and fits within the average returns of what is possible profit to remove from the market,  it’s always bullshit. I hate to burst anyone’s bubble but there is no secret nor any strategy wall street has not heard about. It’s just sales and a flashy website. Put it another way, a trader or property investor may not be aware something is possible due to their limited education, but there are no secrets.

There are a lot of elements so we will break it down.

Capital Protection

Banks. 

Whilst this may seem obvious and redundant anyone who remembers the 2008 (or previous) Financial crises will remember banks going bankrupt. Is the bank where you hold your capital or where your broker holds your capital, have a good credit rating, and are they preferably be backed by the government in times of financial crises. Is the broker you are using holding your money in a separate segregated account or does your broker have access to your funds for hedging, trading etc to generate profit for the brokerage business. You want your capital in a Segregated account to ensure that if the broker goes bankrupt your assets can be returned to you.

Broker. 

What type of broker are you dealing with?

i) Market Maker broker (MM) - a market maker is a broker who makes the market on the other side of your buying and selling. With today’s technology it is very easy to setup a MM company and business. The core strategy of the MM business is to generate profit. The MM business know that 95% of traders will lose money. So based on that statistic they know they have a 95% probability of making profit every time their clients trade. In short, MM business core business profits, come from their clients losing money. Put another way, if the client believes they have a "special" strategy that will make money from a MM broker they will ultimately mean the MM company will lose money. As a business the MM will do everything in their power to ensure they as a business will not lose money. Same as any other prudent business owner in any field. So my question is, do you as an investor wish to be on the other side of a business whose core strategy is to make money from their clients losing money? Even if the trader is really good, how safe is your capital if you are trading to send the broker bankrupt?

ii) Binary Options. This is officially the scam of the century. For a mere $50k or less, a person can setup a binary options business. It holds the same risk and problems as the MM business except on a more obvious level. With MM at least they try to replicate the underlying investment instrument. With binary options there is no legal obligation to do this. It is too easy for the binary option backend algorithms to ensure that the business makes profit from its clients. This is exactly same level as a casino. Yes an individual may be able to generate a profit by playing slot machines once every now and again, but as a whole the house wins. The house has to win, otherwise the house has no business.

The only way to trade and ensure you are investing where the company/business on the receiving side of your trade is not making money from you losing money is trading market direct. Investing is hard enough without having your broker betting against you to loose. Let your broker make their money by simple transparent brokerage fee. Every investor has their own strategy some are long term investors, some are short term investors, some are going "long" the market some are going "short" the market, but the point is they are all trading the underlying value of the stock and profiting or loosing from its direct share price movement.

When selecting a broker an investor needs to ensure that they are trading the underlying instrument direct. Meaning if you are trading stocks like aapl, you actually are trading aapl direct and can get a shareholding certificate from your broker if required. If the investor is trading the futures market e.g. barrel of brent crude oil then then investor is trading the underlying direct. Whilst most brokers these days won’t let the investor receive the delivery of the underling  future, and will roll the futures contract forward to the next month(e.g. receive the actual barrels of oil at expiry) , the point is that the trader is trading the direct underlying instrument.

Forex  market. There are 2 ways to trade forex that is trading the market direct with the futures and options market, the other is through a forex online broker that uses ECN (electronic Communications Networks) and receives commission through spread (some of these brokers forfeit their spread and charge brokerage commission but it is still the same backend). There are 2 types of foreign exchange brokers, that are not futures foreign exchange contracts backed. One is MM which we have covered previously the other is ECN with straight through processing(STP). The ECN will have a direct link to any number of banks which will take the other side of your trade and provide liquidity to you the trader, and then in turn the broker will receive a commission from the widening of spread. So, whilst using a ECN broker with low spreads is an almost viable option, the problem lies in the fact that there is no actual exchange in this forex market so volume cannot be tracked as there are multiple ECNs using different banks through different brokers. This also means open-high-low-close prices vary depending on where you get your data from. To clarify there are traders who use this different potential pricing between ECNs to hedge and generate profits through the Spread between the different banks. It’s a game on a big scale, one you should not be looking into. If you trade foreign exchange the best way is to trade the futures market direct and using the futures options.

Trading is hard enough without having your broker taking the other side of your position and using that hedge, to generate a profit in order to stay in business.

When selecting a Broker be mindful of the pitfalls and how that will impact your financial security and also your ability to generate a profit.

CFDs (Contract for Difference)

 There are 2 types of CFD’s, one is direct market access (DMA) and the other is MM as discussed in point i. Point i provides enough information on the risks of mm services. If your broker charges you a brokerage fee per trade, and is not making money on the spread, and is DMA, this can be used as an effective hedging tool. Whilst not the same security level as  direct shareholding, DMA CFDs are an effective investment vehicle because a DMA CFD pricing is directly linked to the underlying instrument.

Now that we know our capital is not going to disappear due to some dodgy bank or brokerage business we can move onto strategy. Once a broker has been selected it is time to move onto how to be prudent investor investing into the underlying instrument’s an investor wishes to get involved in.

Leverage. A common reason why people go with CFDs and MM is the attraction of leverage for small accounts. If your reason for going with a broker is because of the leverage provided to your account, maybe your problems are bigger then this article can cover.

First is capital protection, second is trading underlying direct instruments and third is strategy. You need to be a profitable trader before you worry about leverage. If you can’t trade profitably on an ongoing year after year basis no amount of leverage will help you. Rather the opposite will happen leverage will ensure you lose all your money really quickly if you don’t have a solid and profitable trading strategy.

There is a lot of different strategies and concepts that are profitable if the investor is willing to put in the hard work. There is no free lunch.

Prudent Investing Points

Number 1.

Don’t believe anything any one tells you, believe only the outcome and proof you need to ensure the trade suits you and where you are at right now in your learning curve. If your broker says buy this stock, ask them why... and then prove it to me... and then what price are you the broker on your personal trading account going to buy this stock.... can you show me your share certificate to prove the purchase... are you telling me to buy because you have already bought the stock and need to sell to someone.... what price and when are you going sell... why... you get the idea. But this is life in general with everything you do, you need to question it.

I have a saying

" the results you get are based on the quality of questions you ask yourself" …. If you ask yourself crappy questions, you will then ask people questions that really are not worth a grain of salt, which in turn will reflect on your outcome.

Number 2.

Setting realistic expectations. The market both property and shares have only so much movement in them, meaning the market can only give you the investor a certain amount of return. If the benchmark ETF (e.g. spy for the US market) (ETF = Exchange Traded Fund) returned 10% last year and the top hedge funds returns were 15% in the same time period, why do you think that there is some secret that you can make 100% over the same time period. Is it not obvious that if it was possible to consistently outperform the relevant benchmarks by 10x that the hedge fund would be doing that? Hate to break the news but hedge funds have billions of dollars in net worth, they have teams of PhDs and Dr’s and other people that are a whole lot smarter than us, and yet their returns are still within the reasonable realm of possibility. That should be telling you something.

It is known that most floor traders and professional traders target about 18 to 20% per annum to cover costs. That is a realistic figure and anything above that is cream, but should not be expected as the norm.

I know it cliche but the core goal, is to be a prudent investor, and ensure your capital loss-risk, is minimized. Returns will naturally happen if this is done correctly.

Number 3. 

1. Invest into ETFs. I don’t believe in investing in a range of stocks to build a “diverse” portfolio and to “spread the risk” because we have seen from history that there is no benefit to this strategy. When you are a beginner, investing into individual stocks is fraught with danger and as an investor you need to be prudent with your capital. So investing into individual stocks is not prudent investing for a beginner. Rather what I am talking about here is investing into ETFs. The easiest way to protect your capital is via ETFs where ETFs are a pool of stocks. From a risk perspective if one stock goes bankrupt and no longer trades the ETF may go down in value but a traders position will not go down to 0$, this is due to all the other holdings the ETF own shares in are worth some sort of value.

2. Invest into non-correlated underlying’s. This means if one stock goes down in value the other will increase in value. This strategy itself will not specifically generate profits but will ensure that the capital of the investor is protected. One thing we have learnt over the last 5 years or so is that when the market crashes, everything falls in value. The old saying of diversification in stocks is no longer relevant, diversification is no use if all stocks fall at once as seen in 2008 market crash. Your portfolio also needs to be non-correlated.

3. Trade small. There is no specific size value but the point is to have a good understanding of the notional value of the underlying you are trading. If the notional value dwarfs your account balance you will have problems and your risk of blowing up your account is increased. A common strategy is using ES futures contracts to generate a profit, and you will hear a lot of new traders talking about their returns. Never mind their returns are calculated on their margin amount, not on the notional value of the futures contract. Should the market go against their position the losses will increase rapidly and turn into a large problem.

The rest of my blog covers actual strategies that you as an individual investor may find suitable based on your personal preferences.

Note: this article is about MM who make a market on synthetic manufactured underlying’s loosely replicating the underlying and whose core strategy is to generate profit from these. In the real trading world MM can provide a good benefit to the market in the form of providing liquidity to the market directly through the markets shares or futures contracts. High frequency trading firms also provide liquidity benefits to the market and are a strong asset to the business.

Profiting from Seasonal Trading Key Dates -- SPY -- BIDU

Profiting from Trading Key Dates -- SPY -- BIDU

My core goal is to provide quantifiable ideas and strategies that can be easily implemented and have high probability of success. The main problem with Seasonal trading is that it is subjective and arguably the edge is gone because everyone knows about the Seasonal impact anyway. So I have put a study together, where we can look at the impact and probability of seasonal trading and how we can mitigate risk, but also have a high probability of a reasonable profit.

The way to do this is to look at historical data of the stock. In this case we will be using Matlab® with Yahoo data. The goal is to find trading ideas where history shows that there is a good risk/reward payoff within a selected date time frame for an underlying stock.

Looking at the historical data of the SPY, I can note straight away that there is actually not much money to be made from “seasonal” date trading. This is based on the investment criteria and inputs I have used in Matlab®.

I will go through my study on the SPY, and show how my analysis was made.

SN	YD	BD	SD	LR	HR	DD	PP	BL
SPY	23.1704	09//10	22//11	3.132	21.1545	-12.326	60.8696	-18.037

Outputs:
SN = Stock Name
Years = Years of data
BD = Buy Date
SD = Sell Date
LR = Lowest Return
HR = Highest Return
DD = Draw down
PP = Percentage Profitable
BL = Biggest Loss

Looking at the SPY I have analyzed 23 years of data. The input variables were set at a max of 60 day time frame block within a year, with the lowest return set at 3% with a min 60% profitable. The output is that the only date range to buy the SPY is 09/10 with a sell date of 22/11 of every year. Over the 23 years that date range was profitable 60.86% of the time with the lowest return within that date range of 3.132%. The highest return in that time period was 21% with a drawdown of 12%. The biggest loss was 18%.

What does all this mean? Well it means that if I buy the stock on the 9/10 with a sell date of 22/11 it will be profitable 60% of the time. If the trade is profitable, the min return I can expect is 3%. But the problem lies in the biggest loss, if the trade is a losing trade; historically the biggest loss was 18%.

Looking at this output we can clearly see that even though seasonality may be an existing thing as an overall trend concept, the reality is that the only date to trade where the min return is above 3% is as noted above. Seasonality does not mean always profitable based on historical data, that is the problem, and with this data set it shows that even to get a small 3% return over 60day time frame, the SPY trader may have to endure a massive drawdown.  As an investor I would not be comfortable with the risk/reward of a potential biggest loss of 18% to have a return from 3% to 21%.

What I look for is ways to reduce the biggest loss and increase the lowest return. If we can get those figures on an even scale, it will give us opportunity to analyze the trade further.

So where to from here, well the output is that we need trade ideas. And trade returns that have a historical edge.

So let’s look a bit further and we come up with BIDU;

SN	Years	BD	SD	LR	HR	DD	PP	BL
BIDU	10.6639	05//04	24//04	5.3834	16.6997	-8.3777	90	-8.4722

Outputs:
SN = Stock Name
Years = Years of data
BD = Buy Date
SD = Sell Date
LR = Lowest Return
HR = Highest Return
DD = Draw down
PP = Percentage Profitable
BL = Biggest Loss

BIDU is an example of when we look at the buy date of 05/04 and sell date of 24/04, based on historical stock data there is a 90% chance that the return will be between 5.3% and 16%. Based on history, the biggest loss was 8%.

We have to bear in mind that BIDU only has 10 years of data to analyze, which gives the strategy only 10 data points.

Likewise with all stock codes analyzed the data set we are looking at is limited, and at the end of the day we have to work with what we have. In a perfect world it would be good to have a 1000 data set points but with this strategy that is the inherent flaw with the testing.

I would not bank your house on this data due to the short time frame, but it does give the trader another way to look at the markets and trade the key dates.

A trading example with BIDU was just recently triggered.

The stock price on the 5/4, was at 183.80. The share price as at the time of 21/4 is 192.74. Looking at this data and the max risk, we can note that the biggest loss was 8.5% during this date time frame. Based on that we can look at selling put option premium at around the 8.5% max loss level, which will increase our probability of profit as well, or alternatively buying the stock with strategy to exit at positive 5% return during that time frame. Either way buying the stock or using options the strategy was profitable this year as the stock went from 183.80 to a high of 197.5 which is greater than the lowest return of 5%.

Trading the EWA Pain Index

Trading the EWA - ETF Pain Index

Continuing the previous blog, we now want to look at the Australian Markets ETF code EWA.

Data output is used by modifying and creating data points within the Zephyr Associates Pain Index.

Below we will analyze the EWA historical data to come up with a trading strategy.

What we can see from the below chart is that at the time of writing the current draw-down is 25% due to the recent pullback. As we can see from the chart of EWA from a technical analysis point of view we can note the formation of a technical base pattern and also in a sideways consolidation pattern. As traders we accept the market can breakout any way, but let’s look at the numbers behind accumulating a position.

If we go through the data we can see that if we bought a contract at today’s price we have a risk of 67%-25% (current draw-down) = 42% based on historical data.

Changing the current price, to the high used in this data set, which is 3/9/2014 of $27.38 it provides us with the following data;

As we are currently trading at $19 and change this puts us in the third contract area of buying within the draw-down area.

Using the zephyr pain index from the high on the 3/9/2014 we can see that mean draw-down sits at 13%.

So now we move onto the numbers;

We can see from the data set below that at 25% and greater draw-down there is a probability of 7.86% that it will not reach or draw-down to that price.

Said differently the market has a 92% probability of rising from these levels based on historical data sets.

And all that can only be good news. So any pull back in this trading range is a highly probable buying opportunity or at the very least selling premium on the put side.