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The Intra-Day Momentum Method with a Trend-Following Filter

The goal of this research is to determine if applying a short-term directional indicator would increase the accuracy of The Intra-Day Momentum Method(IDMM) levels. We will examine the results for three ETFs over the past three months. The ETFs we will examine are the SPY, DIA, and QQQ. While there are many different ways to determine the short-term trend, we will look at three ways to define it. This article will focus on a single approach.  Additional articles will focus on the others.  In this research, we are not seeking out patterns to indicate a change in direction. As a result, this approach will fail during the phase where the markets change short-term direction. In the coming weeks, I will be demonstrating how patterns can help determine short-term market direction change. The results for this research are displayed in the image below.

First, we want to see what we are working with. Over the past three months (February – April 2022) I have applied the IDMM to the SPY, DIA, and QQQ. We will look at the results of applying the model to these ETFs. Most importantly, we want to answer the following questions about the method:

  1. What percentage of the time does the ETF close at or above the ML1 level? What percentage of the time does the ETF close at or below the MS1 level?
  2. Simulate a trade at the levels (ML1/MS1) and close out the position at the end of the day? Calculate the results without any sort of risk management.
  3. Determine percent profitable, win/loss ratio.
Simulation Guide

As Is – Applying the Method

My research shows that if you traded the levels as they are, for the past three months, the results are as follows:

The SPY, DIA, and QQQ closed in the direction of the Level 64.% of the time. This means 64% of the time either level was met ML1/MS1, the market closed at or above the ML1 or at or below the MS1. This was considerably greater than what I would have expected. I usually test all of my techniques using no stop-loss or risk management. This means that I enter a trade (simulate) at the levels (ML1/MS1) with an exit at the close of the day. What this means is that you would be in every single reversal on the WRONG side of the trade. I try to demonstrate a worst-case-scenario, from the start. I do this so that the strength and scalability of the The Intra-Day Momentum Method can be observed.

 Applying a Trend-Following Filter

With the first trend following filter, regardless of the direction of the intra-day levels the performance was less effective from a percentage standpoint. The levels were successful 54% of the time. This was regardless of which level was met. In this scenario, I simulated entering a Long position if the short-term trend indicator was Up. I simulated entering a Short position if the short-term indicator was Down. Using this trend-following approach, the directional filter did not improve the success of the levels.

However, it would have performed much better in regards to the Win/Loss ratio. As the average win was about 50% more in this example than in the example that did not filter for the short-term trend. This is very crucial in trading as many traders would like to see their average win greater than their average loss. That being said, remember, there is absolutely no risk management being used in this research.

This research was conducted based on levels being reached intra-day. There were no other conditions. All fast moves were included. As well, calculations that have demonstrated improved performance of The Intra-Day Momentum Method levels were not performed in this research. Such as the following calculation: Searching for Higher Probability Intra-Day Methods.

Conclusion

In this research, I found that filtering for the short-term trend in this instance did not increase the success of the levels. However, it did demonstrate improved performance in reducing risk. This shows up in the research by increasing the Win/Loss Ratio.

In order to increase the performance of this approach, we suggest the following improvements. Filter for specific price patterns, such as expansions and contractions. Define overbought and oversold conditions. These improvements are likely to enhance the Intra-Day Momentum Method levels.

This research will continue. There will be monthly updates to this work in progress. I will continue this discussion by demonstrating that filtering for certain patterns would likely increase the results. Many of these particular patterns do not repeat often. I will then demonstrate the affect of having a confirmation of the short-term trend combined with reaching the level intra-day. confirming the direction. This will be done for at least three different ways of defining the short-term trend. The goal is to combine all of these concepts to develop a high probability low-risk approach to the intra-day markets.

Red Indicates errors in data received. Yellow = ‘Fast Moves’. Green = First Level reached when an Intra-Day Reversal occurred. Orange = Intra-Day Reversal. Light Green = Day after an Intra-Day Reversal. Light Blue = Day after Gap Reversal.
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Improving the Accuracy of The Intra-Day Momentum Method

In an effort to improve the accuracy of The Intra-Day Momentum Method levels, I have made a few adjustments to the approach. After creating the methodology, I needed a way to demonstrate it as well as a way to track it’s progress. I developed web-based applications to perform these tasks. After a few years, the web-based applications were created. At that time, I also created a way to track the performance of the methodology. The reason for doing this was to create a way to answer questions. Two of the many questions that I wanted the answer in regards to trading were:

  1. Does trend-following give a trader an edge?
  2. Do Fast Moves come from False Moves?

Does Trend-Following Give a Trader an EDGE?

The answer to the first question is provided in this article I wrote a while back: Does Trend Following Give a Trader an EDGE? In this article, I use the Intra-Day Momentum Method (as applied to over 400 stocks from the S & P 500) to demonstrate mathematically that trend-following would likely give a trader an edge.

Because I have been able to mathematically demonstrate, that trend following would likely give a trader an edge. I have updated the approach of the method. I now determine the trend on a longer-term time period, to determine how to trade intra-day. Keep in mind that the speed of the move is not relevant, in this research. The idea is that because the trend is likely to increase the edge intra-day, it may be magnified on a longer-term time period. My previous research demonstrates that this would likely increase the accuracy of the method.

Fast Moves, False Moves?

Do Fast Moves come from False Moves is currently a project that is still in the works. This is research and therefore, it is constantly evolving. The goal of this research is to determine what to do in the case of a Fast Move. We need to identify when a Fast Move is ‘tradeable.’ This will help us to determine when to ‘fade’ a fast move, as well.

Applying a Trend-Following Filter

In the following graphs, you will see that adding a trend-following filter would likely increase the probability of The Intra-Day Momentum Method levels. For this research, the trend for each stock was not identified. Instead, we took a look at the overall market, using the SPY.

The goal was to pick two different time periods when the SPY was trending. One data set was when the SPY was in an up-trend. The other was when the SPY was in a down-trend. The goal was to review the results for The Intra-Day Momentum Method levels on over 400 stocks from the S & P 500, for each time period. If we see an increase in the probability of success from the levels, in the direction of the trend, it suggests we should filter for the trend daily. Not all stocks would be in the same trend. We also know that different stocks are often in different phases of a trend. It is quite possible for a stock to be going in the complete opposite direction of the market. This leads us to believe that filtering each individual stock would increase the percentages even greater.

Up-Trending Market

In an Up-trending market, as defined by a traditional technical indicator. The trend was not mathematically defined. What this data shows us is that we get a higher probability of a close above the ML1 Level. Combine that with a lower probability of a close below the MS1 Level. It clearly indicates that if we can identify the trend, then we should get a more accurate approach. Using this approach, we will determine the trend on the daily and trade in that direction, intra-day. In an uptrend, both the ML1 and MS1 levels are good entry points for LONG positions.

Down-Trending Market

In a Down-Trending market, the method demonstrated the following results. A traditional technical indicator was used to identify the downward trend on the daily chart of the SPY, not each individual stock.

As you can see, the intra-day reversals were greater from the ML1 to the MS1. A larger percentage of the stocks that reached the MS1 level closed below that level as well as below the open. A smaller percentage of stocks that reached the ML1 level, closed above the ML1 level as well as the open.

Conclusion

In conclusion, you can see that applying a trend-following filter increases the probability of the success of the levels. Even though each individual stock’s trend is not the factor for determining the trend, in this research. Instead, the overall market trend, in this case, the SPY. In an up-trending market we see more reversals from the MS1 level to the ML1 level. We also see a higher percentage of closes above the ML1 level as well as the Open. In a down-trending market, we see the exact opposite. We see a larger percentage of closes below the MS1 level as well as the Open. We also see a larger percentage of reversals from the ML1 to the MS1 level. These statistics demonstrate that a trend on a larger timeframe would increase the accuracy of The Intra-Day Momentum Levels success.

What’s Next

The goal now for The Intra-Day Momentum Method is to determine the trend and trade in that direction. Currently, there is one exception. The exception appears after an intra-day reversal pattern. The best opportunity appears to be a trade in the direction of the signal that day. This is due to the fact that the intra-day reversal does not repeat all that often. Our focus will continue to be on additional patterns that indicate a change in direction may be likely. The goal is to identify more mathematical patterns that indicate overbought and oversold conditions. This will give us clues as to when changes in direction are more likely to occur.

I will be sharing more statistics on the trend-following approach in the coming weeks.

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ETF Week in Review

Over the week of 2-7-22 to 2-11-22, the ETFs reached the levels intra-day several times. The Gap Up on Wednesday resulted in a tight range for each of the ETFs. On Thursday however, in a Fast Move, the markets attempted to close the gap. The move failed and later the ETFs became intra-day reversals. All three ETFs reached the ML2 level by 11:30 AM.

SPY

The past week saw a few days where the IDMM Levels were reached in each of the market-based ETFs. The SPY met the MS1 in a late day ‘Fast Move’ and closed above that level. Tuesday, the SPY reached the downside limit before reaching the ML1. The ML1 (449.61) was reached in the early afternoon and the SPY closed above that level. Gap Openings, such as the one on Thursday tend to move back towards the previous day’s trading range. The SPY reached a ML2 (456.06) level by 11 AM. Later Thursday, the SPY became an intra-day reversal. Back-to-back intra-day reversals are not common, but they do occur. Friday, the SPY reached the MS1 Level, after having reached the Upside Limit. It continued lower to the MS2 Level and closed below that level.

QQQ

On Monday, the QQQ made a Fast Move to the MS1 Level in the last 30 minutes of trading. It closed above that level. Tuesday, the QQQ reached the ML1 level and closed above that level. Wednesday and Thursday were gap openings. Wednesday resulted in a ‘Tight Range.’ Thursday, the QQQ opened down and tested Wednesday’s trading range in a Fast Move to the ML2 level (365.20). Later the QQQ became an intra-day reversal. Friday, the QQQ reached the MS1, MS2, and MS 3 Levels and closed below the MS2.

DIA

The DIA consolidated on Monday, as it did not reach either level, the ML1 or MS1. The downside limit was met in early trading on Tuesday. The DIA later reached the ML1 level and closed above the ML1. The DIA gapped up on Wednesday and traded in a tight range. Thursday, the DIA opened down and tested Wednesday’s trading range in a rather fast move to the ML2 level (357.66). Just after noon Thursday, the DIA became an intra-day reversal. On Friday, the DIA reached the MS1 Level, after having met the Upside Limit in earlier trading. The DIA traded down to just below the MS2 level and closed below the MS1 level.

A few things to remember from this week about market tendencies. Gaps have a tendency to move back towards the previous day’s trading range. While they do occur, back-to-back intra-day reversals are not likely.

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ETF Week in Review

The Intra-Day Momentum Method for SPY, DIA, and QQQ for 1-31-22 to 2-4-22

SPY

This week, the SPY reached on the ML1 on Monday and Friday. Monday the ML1 was at 445.76. The SPY never reached the Downside Limit and closed above the ML1. On Friday, the SPY reached the ML1 at 449.60, after reaching the Downside Limit. The SPY closed just below the ML1 Level.

My research suggests that if the red level (Downside Limit) below the OPEN is met, the probability of a CLOSE above the ML1 is slightly lower. This is regardless of the time of day the level was met. It also suggests the likelihood of the market reaching the ML2 Level has diminished. As you can see, on Monday 1-31-22 the red level was not reached. On Friday 2-4-22, the red level was reached in early trading. Just as the likelihood of an intra-day reversal increases with a FAST MOVE to the ML1/MS1 Levels. One would tend to think that the earlier the Lower Limit Down is met, the more likely we could see a close ABOVE the ML1 Level. Because the momentum has changed. A move later in the day to the Downside Limit would be less likely to close above the ML1.

DIA

The DIA reached the ML1 on Monday (1-31) at 348.70. The Downside Limit was not reached during Monday’s session. It closed above the ML1. On Wednesday (2-2) the DIA reached the ML1 at 355.65. Once again, the Downside Limit was not reached during the trading session. It closed above the ML1. On Thursday (2-4), in a rather Fast Move down, the DIA reached the MS1 Level down at 357.88. During the rally back towards the Open, the Upside Limit at 355.79 was never reached. The DIA traveled to the MS2 Level and closed below the MS1 Level.

QQQ

On Friday 2-4, the QQQ reached the ML1 Level at 357.92. It had reached the Downside Limit earlier in the day. It closed just above the ML1 Level.

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Results for 6-10-21

All three market-based ETFs had ‘Fast Moves’ off the Open. The SPY and DIA resulted in Intra-Day Reversals. The QQQ managed to extend to the ML2 Level and after a rather deep pullback returned to that level.

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IDMM-ETF Results December 8, 2020

The QQQ reached the MS1 Level at 305.55 in the first 30 minutes of trading. ‘Fast Move’s often come from ‘False Moves’, as they say. Weak stocks do not tend to pull back all that much. The QQQ rallied after spending just a few minutes below the MS1 Level. It reached the Upside Limit at 307.37 and went on to become an Intra-Day Reversal by reaching the ML1 at 307.97 around 1:30 PM. The QQQ closed just above the ML1 Level.

The DIA reached the ML1 at 301.07 just after 10 AM. The Downside Limit was 299.48. The DIA pulled back slightly, but not to the Open of the day. The DIA reached the ML2 at 302.13 around noon and closed above that level.

The SPY did not reach any levels during Tuesday’s trading session. There was a pattern present, into which I am looking into its historical significance. This pattern has presented itself a few times over the past 6 months and it has been successful at determining the daily direction. I will investigate this further and will present my findings regarding this pattern in the future.

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IDMM-ETF Results December 7, 2020

The DIA reached the MS1 Level down at 300.74 around 1 PM. The Upside Limit was 302.29. The DIA closed above the MS1 Level, but below the Open of the day.

The SPY reached the MS1 Level at 367.72 in the last 15 minutes of trading. When a level is reached so late in the trading day, it is unlikely that you get a move to an extended level without a ‘news-related’ move. The Upside Limit was 369.65, a move to this level this late is not likely unless driven by news.

The QQQ did not reach any levels during Monday’s trading session.

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IDMM-ETF Results December 4, 2020

The DIA and SPY both reached the ML1 Levels between 10 and 11 AM. The SPY ML1 was at 368.60 with a Downside Limit of 366.68. The DIA’s ML1 was at 301.84 with a Downside Limit of 300.19. Both ETFs had solid moves that were not ‘Fast’ in terms of time. Both also did not pull back all that much from the High/ML1 Level. The strongest markets do not tend to pull back all that much. Both the SPY and DIA closed above the ML1 Level.

The QQQ did not meet the IDMM-HP criteria. However, it did meet the ML1 Level at 305.58. Because this move was not part of the IDMM-HP criteria, the likelihood of a close above the ML1 was not as great as the IDMM-HP scenario. The QQQ closed above the ML1 Level.

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IDMM-ETF Results December 3, 2020

The QQQ was an Intra-Day Reversal on Wednesday. Unless there was an increase in volatility, back-to-back Intra-Day Reversals were unlikely. The QQQ reached the MLS1 at 305.71, around 11 AM. The ETF was then range-bound for the remainder of the afternoon. As it traded between the ML1 and the Downside Limit, closing just above the Open.

The SPY reached the ML1 at 368.03 shortly after 3 PM. It’s not likely, to get a move to an extended level before the end of the day. Barring, a news-related move. The SPY then retreated to the Downside Limit at 366.00 and closed just below the Open of the day.

The DIA did not reach any IDMM-HP levels during Thursday’s trading session.

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IDMM-ETF Results December 2, 2020

The QQQ reached the MS1 Level at 300.47 within the first 15 minutes of trading. As mentioned many times, this should be considered a ‘Fast Move’. Fast moves tend to be the most dangerous for a directional trade, as they can oftentimes be ‘False Moves’. Once the QQQ reached the Upside Limit, the likelihood of a close below MS1 diminished considerably. The QQQ then became an Intra-Day Reversal after reaching the ML1 Level at 303.97. Back-to-back Intra-Day Reversals are ‘Rare’. Increased volatility could create a back-to-back reversal.

The DIA and SPY did not reach any IDMM-HP levels during Wednesday’s trading session.