Price Action Lab Alert for Monday, December 17, 2012

A scan of historical data of 12 popular ETFs produced two long signals both for the same ticker for entry at the open of Monday and exit at the close. Both signals show good performance when backtested on the portfolio of the 12 ETFs but also on a portfolio of Dow-30 stocks. Thus, there is substantial evidence against the randomness of the two patterns that generated the signals but this solves only half of the problem.

The other half of the problem is that the next trade can be a loser but the probability for that is low. It is just like tossing a coin with a winning bias towards heads. The next toss can generate tails but in the longer-term heads will outnumber tails. However, all traders, especially those who use discretion in trading and do not rely on automated algorithms, should understand that long-term statistics are not useful when we the focus is on the next trade. Thus, each time a scan is run the probability of win must be maximized as much a possible.  Trading is the art of dealing with probabilities.

These alerts are for Price Action Lab registered users but demo users of the program can also verify them. The reason the symbols are not disclosed is for preserving any possible edge that they may offer.

Instructions

Setup a scan workspace for 12 popular ETFs (DBC, DIA, EEM, GLD, IWM, QQQ, SLV, SPY, TLT, USO, XLE, XLF) using unadjusted daily data since inception and next close exit, NC. The workspace setup is as shown below:

 20121127etfNCwks

Results

After running the workspace on extended scan mode, the results should look like in the screenshot below. Two long signal was obtained. A few tickers are erased for preserving any possible edge that these signals may offer to users of Price Action Lab:

20121214etfNC

It may be seen that the first pattern has win rate of 73.17% and 41 trades and the second win rate of 74.26% and 29 trades. A quick backtest using the backtesting tool of Price Action Lab reveals that the profit factor for the first pattern is 4.62 and for the second 2.77.

Portfolio backtest

The portfolio backtest was done to determine the performance of the patterns on a much larger sample. It may be seen that the first pattern was profitable in 10 out of the 12 ETFs on a total of 446 trades and the portfolio win rate and profit factor are at satisfactory levels:

20121214etfNCPB1

Actually, this pattern showed satisfactory results when backtested on a portfolio of Dow-30 stocks (adjusted data since 01/2000):

20121214etfNCPB2

It may be seen that the first pattern on the results was profitable in 23 out of the 30 stocks on a sample of 1250 trades with portfolio profit factor equal to 1.29.

If the above analysis, i.e. the two portfolio backtests, are repeated for the second pattern, the results will also show that it was profitable in 7 out of the 12 ETFs and in 21 out of the 30 stocks.

Comments

As stated before, long signals should be avoided if the market opens with a large up gap and the same applies to short signals if at the open there is a large down gap because the signal momentum may be exhausted right at the open.  Also, it is important to analyze the significance of these signals in the context of recent price action and always remember that they are of a probabilistic nature.  Note that any alerts posted in this blog are just examples of discretionary price action trading and not part of an automated trading methodology, the kind that can be achieved via the use of automated systems. The analysis presented here does not constitute a trade recommendation.  The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.

Disclosure: no relevant position at the time of this post and no plans to initiate any positions within the next 72 hours.

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