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ETF - IDMM HP RT IDMM-Article IDMM-ETFs IDMM-SP500 QAT Systems, LLC The Intra-Day Momentum Method The Intra-Day Momentum Method - ETFs The Intra-Day Momentum Method - S & P 500

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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Why Math?

“All through time, people have basically acted and re-acted the same way in the market as a result of: greed, fear, ignorance, and hope – that is why the numerical formations and patterns recur on a constant basis.” – Jesse Livermore


I wondered if Jesse Livermore believed that the patterns were numerical, why weren’t we using math to define them?

Why weren’t we using math to solve the problem?

The analysis used by most people typically uses derivatives of what really matters, price. As price is the final arbiter. Traditional analysis does not always represent what actually happened. Creating something that was purely mathematical, would have to be more beneficial. Because something that actually happened would have to be more useful than something that may not have happened at all.

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ETF Week in Review

In a holiday shortened trading week, we witnessed more intra-day volatility as a result of the situation in the Ukraine.

SPY

On Tuesday, the SPY made a ‘Fast Move’ to the ML1 level. This fast move failed and the SPY then became an intra-day reversal. On Wednesday, the SPY continued it’s downward move, reaching the MS1 and following through reaching the MS3 by the end of the trading session. On Thursday, the SPY gaps down on the Open. Keep in mind that a Gap Open is to be considered a ‘Fast Move.’ It seems as though a Fast Move may be a tradeable move in such instances. This is because we know that the market is likely to attempt to test the Low and Close from Wednesday. Friday, the SPY gapped up on the Open, tested the High and Low from Thursday rather quickly. And continued higher for most of the day.

DIA

Tuesday the DIA gapped down on the Open and traded in a tight range. Wednesday the DIA reached the MS1 level down shortly after 10 AM. It continued lower much of the day and reached the MS3 level down just before the close. Thursday, the DIA gapped down on the Open. The DIA traded in a tight range until late in the day. It began trading higher and reached the ML1 Level and tested Wednesday’s low. Friday, the DIA gapped Up slightly, but never tested Thursday’s High.

QQQ

Tuesday, the QQQ gapped down slightly and made a ‘Fast Move’ back to test Friday’s Low and Close. Wednesday, the QQQ met the MS1 Level down shortly after 10 AM. It continued lower throughout the day and reached the MS3 level before the close. Thursday, the QQQ gapped down on the Open. Remember a large gap opening should be considered as a ‘Fast Move.’ In a gap opening, you should consider the distance needed to travel to reach the previous day’s price action. Something else to consider when studying gaps: How the market closed in the previous session.

Lessons for the Week: ‘Fast Moves’ have a tendency to come from ‘False Moves.’ Gaps on the Open are ‘Fast Moves.’ Pay attention to the distance the market needs to move. How far does the market need to to travel? This question will help you determine if a test is likely.

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ETF Week in Review

The ETFs reached the Intra-Day Momentum Levels several times this week. The levels are presented in the graphs with explanations of market action.

SPY

The SPY reached the MS1 in a fast move down on Monday and closed below the Open. On Tuesday after a Gap Up on the Open, the SPY traded in a narrow range and did not fill in the gap from Monday’s price action. Wednesday the SPY failed once again to close the Gap from Monday-Tuesday. It later rallied to the ML1 around 2 PM in a ‘Fast Move.’ On Thursday the SPY reached the MS1 (440.16) shortly after 10 AM and pulled back off the low. Later in the afternoon, the SPY reached the MS2 (437.10) and closed below that level. On Friday, the SPY reached the MS1 (433.52) Level down just before noon. I rallied back to the Open and closed below the Open and above the MS1 level.

Fast Moves Intra-Day

One of the more challenging obstacles is identifying the ‘Fast Move’ that occurs over multiple bars in data normalized by time. Such as the ‘Fast Move’ to the MS1 level on Monday afternoon in the SPY.

QQQ

The QQQ traded in a narrow range on Monday and Tuesday. The QQQ gapped up on the Open on Tuesday and did not fill the gap in intra-day trading. On Wednesday, the QQQ reached theMS1 (351.05) down in a Fast Move at the open. Later in the day, after testing the MS1, it made a Fast move to the ML1 (356.79). On Thursday, the QQQ reached the MS1 down (349.45). Pulled back and continued lower to the MS2 (346.24) and closed below that level. On Friday, the QQQ reached the MS1 level down (342.84), continued lower without much of a pullback. After it reached the MS2 (339.27) around 1 PM and rallied back to above the MS1, but closed below that level.

DIA

On Monday, the DIA reached the MS1 (343.88), pulled back off the lows to test the Open and the High of the Day. The DIA later tested the MS1 and closed below the Open and above the MS1 level. Tuesday, after a Gap Up on the Open, it did not fill the gap from Monday-Tuesday. On Wednesday the DIA reached the MS1 level in a test of Monday’s High before a rally to the ML1 level. Thursday, the DIA reached the MS1 (354.42) in a Fast Move, in the first 30 minutes of trading. The DIA reached the MS2 (343.41) level, in late trading and closed below the MS1 level, above the MS2 level. Friday, the DIA gapped down on the open and quickly tested Thursday’s high and close.

Lessons for the Week

Lessons for the week: 1. Fast Moves intra-day are more challenging to identify, than those that occur at the Open. 2. Pay attention to how far a market moves against a directional move or level. You will notice, that the strongest and weakest markets do not tend to have deep pullbacks.

Method to the Madness

In his book, The Logical Trader, Mark Fisher pointed out a few very important aspects of the markets worth noting. Fisher pointed out that a move to one of the ACD levels that occurred rapidly, did not generate a signal. He stated that if a trader had an Opening Range of 5 minutes, then the market must trade at the A Level for at least 1/2 of the time of the opening range. In this case, the market would have to trade at the level for 2.5 minutes. The concept of the ‘Fast Move’ certainly gives an enormous amount of credibility to that idea.

Fisher also indicated that market-based instruments were more challenging to trade because of their tendency to ‘back-and-fill.’ I interpret this to indicate that he feels as though they may not ‘trend’ all that well. This is also the reason I am demonstrating The Intra-Day Momentum Level by applying it to market-based ETFs.

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SPY reaches MS1

In a ‘Fast Move’ which occurred shortly after the Open, the SPY reached the MS1 Level down at 380.35. The Intra-Day Fast Moves, which occur at times other than ‘off the Open’ can be considerably more difficult to recognize, as they can occur over multiple bars in ‘time-frame based analysis.’ The SPY went from above the Open to below the MS1 level in less than 30 minutes. The further a market moves in a short period of time, the more overbought/oversold the market would have become. The Upside Limit in the SPY is 383.24. The question to answer is ‘Do you fade or trade the Fast Move?’ It appears that ‘Fast Moves’ tend to pull back and possibly reverse more frequently than a slower move to the levels. Fast moves are likely to indicate that if you want to take the ‘directional trade’, you should wait for a reasonable pullback or a definable pattern such as a ‘Double Top’ or ‘Double Bottom’. Understanding that if the market reaches the Upside Limit, the likelihood of a close below the MS1 would be diminished. According to ‘The Logical Trader’ by Mark Fisher, market-based ETFs, such as the SPY, DIA, and QQQ have a tendency to ‘back and fill’. For this reason, when demonstrating The Intra-Day Momentum Method on these instruments, I typically use the method to define patterns such as Double-Bottoms, Double-Tops, and Pullbacks.

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SPY and DIA reach MS1 Level

The SPY and DIA both reached the MS1 Levels down in the first 30 minutes of trading. The most dangerous moves for the directional trade are ‘Fast Moves’. Fast is defined as reaching any level defined by The Intra-Day Momentum Method in 30 minutes. In other words, a market that moves a specified distance in price over a defined period of time.

The SPY MS1 is 371.16, with an Upside Limit of 375.00 .

The DIA MS1 is 300.38, with an Upside Limit of 303.23.

If a market reaches the Upside Limit, the likelihood of a close below the MS1 diminishes.

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SPY, DIA, and QQQ reach ML1

The SPY and DIA both reached the ML1 level in the first 15 minutes of trading. The QQQ was a little slower to react, reaching the ML1 around 10:45 AM. Fast Moves often come from ‘False Moves’. Was yesterday’s ‘Fast Move’ down a ‘False Move’? Only time will tell, the strongest markets do not tend to pull back all that much.

The ML1 in the SPY is 378.81. The Downside Limit is 375.13.

The ML1 in the DIA is 306.51. The Downside Limit is 304.21

The ML1 in the QQQ is 323.33.

The question to seek an answer to might be: Does yesterday’s ‘Fast Move’ down, justify today’s fast move in the opposite direction?

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SPY reaches MS3 in early Trading

The SPY reached the MS3 Level down at 380.19 by 11 AM Monday morning. This was a relatively ‘Fast Move’. Fast Moves often come from ‘False Moves’.

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DIA reaches ML1

The DIA has reached the ML1 Level at 311.46. The Downside Limit is 309.91. Strong markets do not tend to pull back all that much. A move to the Downside Limit would reduce the likelihood of a close above the ML1.

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SPY reaches MS1

The SPY reached the MS1 in a late afternoon decline. The MS1 Level is at 379.26. The Upside Limit is 381.26.