A Simple Technique to Predict the Daily Close
Scott Andrews
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Disclaimer
This material is intended for educational purposes only and is believed to be accurate, but its accuracy is not guaranteed. Trading and investing has large potential rewards and large potential risks. You must be aware of, and fully
understand, these risks and be willing to accept them in order to invest in equity, futures, options, currencies and other financial markets. Do not trade with money that you cannot afford to lose. This material is neither a solicitation nor an offer to
buy or sell equities, futures, options, or currencies. No representation is being made that any account will or is likely to achieve profits or losses similar to those
discussed. The past performance of any trading system or methodology is not necessarily indicative of future results.
CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS.
UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER
COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED
WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.
Use this information at your own risk. Sound money management should always be your #1 priority.
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Definition
For purposes of this presentation,
“The Close” is the price of the last trade
of the regular session hours.
(ETFs: 4:00 pm ET, Futures: 4:15 pm ET)
What Were You Thinking?
(or what would you have been thinking?)
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Example: February 22
Closes up 1%
If you were short, what were you thinking?
If you were long, what were you thinking?
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The Next Day: What Would You Do?
Gapped up ½%
But where did it close?
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The Next Day: What Would You Do?
Gapped up ½%
But closed down 1.7% !
The wrong decision could fake you out of a
winning short trade & worse turn it into a loser!
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Example: June 22
If you were short, what were you thinking?
If you were long, what were you thinking?
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The Next Day: What Would You Do?
Gaps down 1%
But where did it close?
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The Next Day: What Would You Do?
Closes down
another 1.5% !
Gaps down 1%
If you were short, the right decision captured
another 1.5% after the open
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The better you can predict the close, the better you can:
Optimize your trade entries
Optimize your trade exits
Minimize your trade losses
Maximize your trade profits
Simple rules that will help you about 25% of the trading
days…
These 3 factors greatly impact the closing direction:
1. Opening Gap Direction
2. Opening Gap Size
3. Position Relative to 10 DMA
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Key Definitions
• ATR (Average True Range): the average daily movement of a
market (distance between the high and low of a day, including the
prior closing price in order to account for any overnight gaps).
• PF (Profit Factor): the ratio of historical gains and losses.
– If PF > 1 : that scenario has made money historically
– If PF < 1 : that scenario has lost money historically
For example, a PF of 2 means that the gains from the winners
exceeded the losses by twice as much.
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10 Year Historical Odds of Closing Above the Open
The LARGER the gap, the GREATER the odds of a
move BEYOND the open (away from prior close)
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10 DMA
10 DMA
But Position Relative to the 10 DMA Is Very Important
Above
Below
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10 DMA
10 DMA
But Position Relative to the 10 DMA Is Very Important
Above
Below
Odds of Closing Higher:
1) HIGHEST if gap is LARGE & UP & < 10 DMA
2) LOWEST if gap is LARGE & DOWN & > 10 DMA
But these rules will only help you about 25% of the time.
So what about the other 75%?
How I calculate closing direction probabilities each day:
Past 10 Years (2,500 days) of Historical Data
+
Direction & Size of the Opening Gap (Bayesian)
+
Average of 5 Different Market Models (Ensemble)
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5 Ways to Measure a Market
Trend: the general direction of a market or security over a period of time
Momentum: the strength of a security's price in a specific direction
Volatility: measure of the prior day(s) to prior periods in terms of range contraction and expansion
Overbought/Oversold (OB/OS): when an asset's price has moved too far, too fast and may be over / under valued
Seasonality: for the purposes of closing odds analysis it refers primarily to the day of week (e.g. Monday, Tuesday, etc.)
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Example: October 9, 2013
(The above shows the weighted average of the
5 models as posted at ClosingOdds.com
the evening of October 9)
S&P 500 (ES) Daily chart
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Example: October 10, 2013
October 10th
open: 1667.50
(Gap up > 1%)
Closed Up > 1%
above the open
Gap direction, size and market conditions are extremely
powerful for determining the historical closing bias
“But how can I track all of these factors & the historical odds for a
given day?”
1. Use a backtesting application or excel spreadsheet to determine historical
probabilities
2. Then, track the daily closes and opening prices to determine that day’s odds
Or ….
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Use my free daily research: ClosingOdds.com
My personal daily closing odds delivered to your inbox nightly for the next day
Futures & ETF Markets:
• S&P 500
• Dow 30
• NASDAQ 100
• Russell 2000
No need to track the key levels or different market conditions
For a copy of these slides & free daily odds,
sign up at ClosingOdds.com
(note: the slides will be available for download via a link in the daily CO email)
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