I am sorry that blogging has been light this week. There has been so much to read and to do. I have been following the European situation and UK politics as well as reading a couple of excellent trading books and experimenting with simple systematic strategies in Tradestation. I have put a daily reminder at least to write my diary, so perhaps I will get better at it!
The most fun of the latter was finding a consistent 55% edge over 20 years in the S&P 500 just by counting how many times an up day was followed by another up day, or a down day was followed by a down day, averaging over a year, and then buying either after an up day (when that is working more often) or buying after a down day (when that is working more often). The conclusion: there are long periods where up days are generally followed by up days, and long periods where down days are generally followed by up days. It’s interesting how much this moves around — below is a chart that shows the effect, with red showing how many up days out of 250 were followed by up days, and blue showing how many down days were followed by down days. I am not sure this is tradeable, as it doesn’t work as well in the SPDR ETF.
The more practical work of the past few days has been programming an indicator that shows the average volume traded at each point through the day — so that one can see if volume in the last few hours has been high or low, relative to the average. I am quite pleased with it, and have learned more about programming in Tradestation.
I have been paying more attention to volume, and indicator that I have neglected up until now. I have looked at it, but I haven’t really believed in it. Reviewing some past bad trades — missing cocoa, wimping out of EUR/USD, etc. — has made me think that I might have played them better if I had paid more attention to what volume was telling me. I also had an interesting chat today with a successful trader who thought that the general process that I am developing ought to work in the long run — although he warned that returns may be lumpy.
I have made use of volume in today’s gold trade. I would not normally have bought a breakout from the opening range as I did today, but would have waited for a pullback. The problem with that is that a decent pullback sometimes never comes. The increase in volume as the price broke out intraday makes the price more likely to run upwards again today. And if it doesn’t, I will have to get back in again later. Another thing the experienced trader said was that in a strategy like mine, one has to be prepared to take a lot of losses.