When To Go Short: S&P Intraday Price Study

March 14, 2016 5:00 am0 commentsViews: 2976

This article is going to be an extension of a previous article where we performed an intraday price study. We do this by exploring different market sessions to determine if we can find an edge for a possible intraday trading system. If you have not read the previous article, When To Go Long, I urge you to read this because we are going to jump right in and explore the same concept on the short side.

As a reminder here are the five different market sessions we will be looking at.

Six Market Sessions
  1. Pre-Market, 06:20 – 08:30
  2. The Open, 08:30 to 10:40
  3. Midday, 10:40 to 13:50
  4. The Close, 13:50 to 15:00
  5. Post-Market, 15:00 to 17:10
We will be using the same trading principles as used in the previous article. The only difference is we will be shorting the market instead of going long. For the trend following entry rule I will use the 12-period momentum calculation and open a short position if the momentum is below zero. For the mean reversion entry rule I will use a 14-period RSI and enter a long position when the value is above 75.  I will also be using a simple 200-period moving average applied to the daily chart to act as a regime filter. A single trade is entered and the position is closed at the end of the particular market session as defined above. We are allowing only one trade per day. Slippage and commissions are not deducted and no stops are used. Here are the entry rules again:
Trending System Entry = 12-period Momentum is greater than 0
Mean Reversion System Entry = 14-period RSI < 25

Testing Trend Following Characteristic

BEAR MARKET: We will only open our short trade when price is trading below the 200-day SMA. Below is a bar graph representing the average profit per trade for each period. Period 1 starts on the left-hand side through period 5 on the far right-hand side. During a bear market there seems to be not much of an edge. Sure the last two sessions, The Close session and the Post-Market session, show  the most profit, but it’s not much.

Winner: None? Sessions 1, 4 and 5 are hardly above zero.

Short Trend Bear - When To Go Short: S&P Intraday Price Study

BULL MARKET: Now I will reverse the regime filter so we will be shorting during a bull market. That is, we will be opening new trades when the price is trading above the 200-day simple moving average. Below is a bar graph representing the average profit per trade for each period. What this shows is during a bull market there is an edge with shorting during the Close and Post-Market sessions.

Winner: Both the The Close and Post-Market.

Short Trend Bull

Testing Mean Reversion Characteristic

BEAR MARKET: Now I will test our mean-reversion trading system rules over the five different periods. Below is a bar graph representing the average profit per trade for each period. The only session which is positive is during the Post-Market session. So for most of the sessions, short during a bear market is not profitable.

Winner: Pre-Market Session

Short Mean Bear

BULL MARKET: Let’s now look at our mean-reversion trading strategy during a bull market. Below is a bar graph representing the average profit per trade for each period. Here there are three possible sessions which show positive returns. Those are Pre-Market, Midday, and Post-Market sessions. Strange how shoring during a bull market is producing more sessions which make money.

Winner: Pre-Market, Midday, and Post-Market

Short Mean Bull

Conclusions

The graph below may look a little confusing at first. Focus on the bars above the zero line that show the most average profit per trade. Ask yourself, which bars are the largest? Notice the blue bar for session 5 (Post-Market) is the largest. This group is our trend following system during a bear market. It says that shorting after the close when we already have falling momentum is likely to be profitable.

The next two largest bars are colored yellow. Those are the mean-reversion systems during Pre-Market and Midday. During these times shorting might be profitable when using a mean reverting type strategy.

Go Short Summary

Trend Following

If you’re looking to create an intraday trend following system there are two possible choices for further exploration:

  • During a bull market look for an entry point during The Close or Post-Market session.
  • During a bear market, none of the sessions or systems look viable.

 

Trend_Bull_5

During a bull market look for an entry point during Post-Market session.

Trend_Bull_4

During a bull market look for an entry point during The Close session.

 

Mean Reversion

If you’re looking to create an intraday mean reverting system there are several possible choices for further exploration:

  • During a bull market look for an entry point during Pre-Market, Midday, and Post-Market sessions.
  • During a bear market look for an entry point during the Pre-Market session.
Mean_Bull_3

During a bull market look for an entry point during Midday sessions.

 

Mean_Bull_1

During a bull market look for an entry point during Pre-Market session.

 

Mean_Bull_5

During a bull market look for an entry point during Post-Market session.

 

Mean_Bear_1

During a bear market look for an entry point during the Pre-Market session

Remember, both the trend following and mean reverting strategies presented here are not viable trading systems as they currently stand. You simply can’t expect these simple trading strategies to produce results with real money. These are nothing more than indicators to point us to the right direction. However, what this article and the previous article do demonstrate us a way to analyze the market in an attempt to find an edge.

Downloads

Intraday Session Test Short Only Strategy Code (TradeStation ELD)
Strategy Code (Text file)
Workspace (TradeStation TWS)

Jeff is the founder of System Trader Success – an inBox magazine dedicated to sharing great ideas and concepts from the world of automated trading systems. Read More Google

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