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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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The Intra-Day Momentum Method

I discuss the historical results for The Intra-Day Momentum Method. This model applied to over 400 stocks from the S & P 500. The results are from April 2015 through October 2020.

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QAT Systems, LLC The Intra-Day Momentum Method The Intra-Day Momentum Method - ETFs

IDMM -ETF Results October 19, 2010

All three market-based ETFs (SPY, QQQ, DIA) reach the MS1 level down in the first hour of trading. These ETFs continued lower and close below the MS3 Level Down during Monday’s trading session. Notice that after reaching the MS1 Level, each market pulled back. However, the pullbacks were not deep. Markets that pull back deep into the trading range are less likely to reach the extended levels.

The DIA reaches the MS1 @ 285.39 around 10:15 am and closes below the MS3 Level
The SPY reaches the MS1 Level 346.98 @ 10:15 and closes below the MS3 level.
The QQQ reaches the MS1 Level 288.40 @ 10:15 and closes below the MS3 level.
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QAT Systems, LLC The Intra-Day Momentum Method

Are you looking for an EDGE?

The Intra-Day Momentum Method is a model for determining the intra-day market direction. The model was developed to find historically significant levels across a large number of stocks.

The model was applied to over 400 stocks from the S & P 500 from 4/2015 to the current day. The statistics are shown below.

Historical Results for The Intra-Day Momentum Method