Creatures of Habit

human or algorithm executing entries and exits

"Creatures", in this case =  human or algorithm executing entries and exits.

I was searching for a generic photo that has the different days of the week, but in different languages, when I came across this graph, which shows historical Days of Week averages of patients waiting for CT scans... which you may think has absolutely NOTHING to do with Trading or Investing strategies... right?!

WRONG!
 
Look at the hours of the day... humm.


I'm not going to dive deeply into human psychology, behavior but if you spend some time studying Behavioral Finance, you'll find many real-world justifications for why certain days have certain patterns, even extracting the algorithms from the equation, the human effect upon the market, therefore the human behavior upon the market is quite easily quantifiable, and to the average investor/trader/developer, looking at days of week patterns could be something useful to help improve your outcome, without diving deep into BF.

​Some simple studies/indicators can be developed to search for each days (M, T, W, Th, F, S, Su) averages such as:
  •  Volume  (Volume Total, Up Volume, Down Volume, Volume Ratio)
  •  Volatility & ATR (Total, Upward movement, Downward movement)
  •  Momentum (Total, Upward movement, and Downward movement & applied to Volumes)
  •  Close > open and Open > close  (Up and Down bar ratios)
  •  > XValue   (XValue can be a Moving Average or historical S&R, etc. Ex: Close > Lowest(high,20)[20])
Then you add some simple contexts like current conditions, trends, directional biases, expanding contracting volatility or momentum, change of accel or decel, strength and length of cycle, etc. These very simple methods can be used to "set the stage". But, before we go into specifics, let's talk a little about WHY... WHY does all the days of week have different averages, patterns, etc.? Well... that's because we as humans have patterns... patterns in our work methods and practices, personality, behavior, actions, attitude, and when you're dealing with a large industry, these patterns can be measured, and have an impact on price.


Ex: ​Majority of humans, despise getting up early on Monday to go to work ​right away after they came home from a long weekend at camp... or the beach... or the ball game. So Mondays, start slow for you, until you get back in the "groove" of your work week... which could be after the ​second or third cup of Joe, which would lower the number of Discretionary traders. However, many traders, firms, or systems close out positions on Friday, to control risks, so they may be jumping back in on Monday... Now, the humans in the pits on Wallstreet or CME are no different.

When you add the algorithms into the equation, they simply multiply the effect because that's what they do - they increase volatility, liquidity, etc. So any human behavior pattern, that has small effect on the market is now multiplied. Also, algorithms are developed by humans, so in many instances, they reflect the desires of a human... Ex: Human Trader Brad is a swing trader but he closes out all positions on Friday so he doesn't hold any risk over the weekend. Brad also developed a system that trades a different strategy, but deploys the same EOW exit logic for risk mitigation. So you have End of Day Exits (Known as the 2 Oclock FU), and End of Week Exits. Then you have algorithms that multiply and increase price direction strength/momentum/vola/etc. So you can get massive price movements at certain times, and on certain days.

I could go on for years, detailing every reason why certain times of every day, or certain times of certain days or weeks, or certain minutes of certain hours have these patterns. Such as Economic & News reports, Earnings releases, Session open/closes, lunch time siesta, "effects of Next bar executions", start of week, end of week, start of day, end of day, start of bar, end of bar, etc...
​Basically, you can create a simple strategy that does not require Intense Quantitative analysis... just some simple run-of-the-mill technical analysis will work fine.

Here are Daily EC's from a Long Only strategy that has Generic Four lines of code, and allows three entries (1 contract per entry).

​If DayOfWeek( Date ) = DayOfWk and close open then Buy next bar at close limit;
​If DayOfWeek( Date ) = DayOfWk and close > open then sell next bar at close limit;
​If mp = 1 and close > open and openpositionprofit > 0 then sell next bar at close limit;
​if mp = 1 and close > open and closeW > closeW[1]  then sell next bar at close limit;

*Disclaimer: Historical performance whether live or simulated may not be indicative of future results. Trading Stocks, Options, FX, or Futures involves significant risks not suitable for all investors. Investors should only choose to invest funds ​they can afford to lose without impacting lifestyle. Price activity is not always predictable or repetitive, thus any strategy developed using historical data will be equally unpredictable. We do not guarantee our strategies or analysis methods will perform profitably and/or replicate results shown above, for any length of time. Before leasing/using our products, please consult your investment professionals to discuss if our products are right for your risk tolerances and objectives. Price activity is not always repetitive or predictable, thus any strategy developed using historical data will be equally unpredictable.

Monday

Tuesday

Wednesday

Thursday

Friday

So as you can see, if you are using a "Value" long only investing strategy, you could improve performance, simply by being a little more selective on which day(s) you allow entries to execute @Value.

Now, I realize these Equity Curves are not super great, but to offer decent performance from such a simple statement, imagine if you dug a little deeper and  traveled a little further into the abyss. Or even if you just wanted to add a few statements to help control risk... no problem. The point is, you can use simple methods in a creative way, you can implement foundations of complex reasoning into a simple structure. You don't always need 1,000 moving parts. 

You can implement behavioral finance into your concept with something as simple as analyzing Time - Based patterns. Remember, most systems are End of Bar systems... ( ie. they execute using "NEXT BAR AT MARKET" or "NEXT BAR AT CLOSE LIMIT" or "NEXT BAR AT BID or ASK... ETC."). Also, the majority of larger firms uses Daily bars and only trades U.S. sessions, so orders are executed in market open. Or, if they use a smaller bars size, like a 15-min... if you had to choose "The most Important part of the 15-min bar?", what would it be? The first 30-60 seconds, because the majority of systematic traders are using End of bar so their volumes are higher at the beginning, and Discretionary traders volume is higher afterwards. What's really interesting is when you break down, which is historically more profitable by analyzing and comparing future price direction to the volume ratio of each segment and trade type (Discretionary and Systematic), within the bar but that discussion is for another post.

For now, let's keep this in the framework of "investing". If you know the market has an upward bias and uptrend is still strong, and the 2 Oclock FU combines forces with the Friday End of Week Exit or the Monday End of Day Exit (because many Econ reports are released on Tuesday + Sluggishness of Blue Monday) to generate a massive downward price movement, you could place your Long Entry, just before market closes at an extreme/new price low... ie. value. The graphs above are applied to ES E-minisP500 Futures. However this concept can also be applied to Stocks, ETF's, Bonds, etc. Some markets will vary, and some may have specific patterns that no other market has, but the concept in general should be applicable.

This is just a single, simple, and common example of when you break down Time, Price, Days, Weeks, Volatility, Momentum, and Volumes within the context of Human & Systematic Behavior, there are REAL supporting reasons why these patterns exist, and why they are likely to exist in the future, which also makes it easier to identify why and when they will not work in the future.

If you really want to dive deep, you have to break it down into minute by minute, day by day, etc. analysis... the data is extremely useful but also very time consuming. 

I realize this is all common knowledge to experienced Quants/Traders, but to the average investor/trader/developer, this is something that could be easily implemented into their strategy, even a buy and hold to improve their outcome, which is the objective of this post. In the next post, I'll dive deeper into the Quantitative analysis of this concept/analysis method/data. Any rate, I hope some of this is useful, and good luck on your never ending journey of discovery!


Brian

*Disclaimer: Historical performance whether live or simulated may not be indicative of future results. Trading Stocks, Options, FX, or Futures involves significant risks not suitable for all investors. Investors should only choose to invest funds ​they can afford to lose without impacting lifestyle. Price activity is not always predictable or repetitive, thus any strategy developed using historical data will be equally unpredictable. We do not guarantee our strategies or analysis methods will perform profitably and/or replicate results shown above, for any length of time. Before leasing/using our products, please consult your investment professionals to discuss if our products are right for your risk tolerances and objectives. Price activity is not always repetitive or predictable, thus any strategy developed using historical data will be equally unpredictable.

--By Brian Miller from blog Optimizedtrading

About the Author System Trader Success Contributor

Contributing authors are active participants in the financial markets and fully engrossed in technical or quantitative analysis. They desire to share their stories, insights and discovers on System Trader Success and hope to make you a better system trader. Contact us if you would like to be a contributing author and share your message with the world.

>