The Intra-day Momentum Method was designed to help determine the best way to trade a particular stock / ETF, whether it be trend-following or reversion to the mean, in connection with a low-to-mid frequency intra-day trade. In order to determine which method had worked best over time, I created an algorithm that would find a measurement in price from the Open where the Close of the day had historically been above this level for Longs or below this level for Shorts approximately 50% of the time, for many stocks. While this is by no means perfect, it certainly gives a trader a method for selecting stocks and entry points that have a reasonable chance for success. The Method was developed to adapt to market changes rather quickly as it takes into account price-action, patterns, and volume. The most important factor that one must take into consideration is that not all stocks / markets have the same tendencies. By designing a more scientific approach to trading, a methodology based on ‘measured moves’, gives a trader or researcher, the ability to identify historical tendencies across many markets. The Intra-Day Momentum Method gives the trader confidence in his trade decisions by using statistical analysis of price patterns and can be used as a guide to help a trader with Trade Entry, Trade Exit, and Risk Management.
This is a sample of the Intra-day Momentum Level Trading Research.
In order to determine what stocks to trade on a daily basis, the overall daily range is the starting point for evaluating which stocks to trade. When analyzing stocks / markets that do not move a reasonable distance in price (less than 1.00 from Low to High), I have found these methods are not of much help in determining daily direction. The historical probability of a Close above or below the calculated Momentum Levels tends to diminish considerably, to approximately 45-47%, in many instances when dealing with stocks with a low price range intra-day. This Method is still helpful in determining which side of the Open, above or below, the Close of the day has been on. However, when the range is tight, there is simply not enough price movement to work with. Stocks that have a very small ranges do not have the propensity to establish a sizeable trend on an intra-day basis.
Daily Direction for the Intra-Day Trader
Once a Momentum Level has been reached, either Long or Short, the ‘low-to-mid’ frequency trader would also benefit from looking for trade opportunities on the side of the Momentum Method Indication for Daily Direction. After Daily Direction has been determined, historically, the Close of the Day has been on the side of the Open of the Daily Direction Indication of that day, approximately 75-80% of the time, for many stocks / ETFs. This gives the trader, many opportunities to look for entries using many different techniques for trade entry.
Long Level Up
FDX Crossed Above the Long Level Up. Historically, the Close of the day has been above the Long Level Up in FDX 57% of the time. The Close of the day historically has been above the Open 83% of the time, once the Long Level Up had been reached. Historically, many stocks display the same tendency, which is to Close above the Momentum Level Long approximately 50% of the time, once the level has been reached. The Close has historically been above the Open 75-80% of the time, once the Levels have been reached, in many stocks.
Short Level Down
This is an example of a Short Level Down being reached in AAPL. Historically, the Close of the day has been below the Short Level Down approximately 48% of the time in AAPL, once the Short Level Down had been reached. Historically, the Close of the day has been below the Open 82% of the time in AAPL, once the Short Level Down had been reached.
Historical Probability of Reversal
Upon finding Levels that allow me to ascertain that the historical probability of a stock closing in the direction of these levels was approximately 50%, my goal was to reduce the probability of a reversal. A reversal is defined as a day when both the Long Level Up and the Short Level Down are reached in the same trading session. After arriving at my initial findings, I had developed an algorithm that had found levels that would allow for a stock to create a reversal to the other side of the Open, by approximately the same distance in price roughly 30% of the time. In order to create a more robust method, I began to adjust for specific price patterns, which allowed me to improve on the results to some degree. Making further modifications to the algorithm allowed me to find Levels that historically generated a reversal approximately 25% of the time, for many stocks/ETFs. I am actively searching for new ways to better improve the method and feel that I will be able to effectively generate reversal probabilities less than 20% of the time, for many stocks/ETFs.
The Intra-day Reversal
The Momentum Method was designed in an attempt to avoid this scenario, as much as possible. On 4/30/2013, AAP reached the Short Level Down and then rallied to cross above the Long Level Up. Historically, this has happened 23% of the time, in AAP. The Intra-day Reversal has occurred approximately 25-30% of the time, in many stocks.
False Moves come From Fast Moves
If the Momentum Level is reached in rapid time, it is possible that this is a move that is not sustainable. Fast moves often come off the Open and can reverse rather quickly. These moves are often generated by news or some other event that many believe to be relevant, but in fact may not be. By fast move, I am referring to the time from the Open to when the price is met. If this price is reached too fast, it is often to the benefit of the trader to take a reversal of the trade.
A trader can use the Intra-day Momentum Method in combination with any entry technique that he/she currently implements. The Method can be used as a guide to help a trader better understand intra-day price patterns and to help identify high probability, low-risk trade entries for the low-to-mid frequency intra-day trader.
One of the advantages of developing a methodology based on ‘measured moves’, is that it allows a trader to attempt to control risk at trade entry. Once the Momentum Method has indicated the Daily Direction for the day, a trader knows that historically, the Close of the day has been above or below the Open approximately 75-80% of the time. This allows the trader to calculate with some degree of certainty, his/her risk exposure at the time of entering a trade.
The Intra-day Momentum Method was designed to give a low-to-mid frequency intra-day trader confidence in making better trading decisions. This method for determining daily direction is scalable and can be used in conjunction with any tool or technical analysis that a trader currently implements to arrive at his trading decisions. The method also helps a trader outline risk parameters for a trade, at the time of trade entry. This article is a brief description of the Intra-day Momentum Method, in a more advanced version of the method, I extend the Price Levels out, to determine historical probabilities of more events occurring.