In this
study we are trying to work out it, after a run up or down in a stocks share
price, what is the probability of a reversal or trend continuation, and if
there is an opportunity, how much will the share price reverse or continue in
its trend.
Is the
share price movement random? Can a trader expect for the trend to continue? So
to add to this contribution I thought it prudent to see if there is any value in,
and what is the statistics and probability of, a continuation of a trend or the
reversal of a trend. We will look at
each bar in reference to its previous bar and see where there is opportunity if
any.
This
concept, idea or thought is not a new one. Rather it is as old as the hills. The
point of the article is to put it in a clear format so a trader can provide
context around their next trade. If the stock has moved up, say 4 days, the
reader will know what the probability is for the trend to continue and by how
much. Knowing this provides the trader and investor a realistic share price
target. We all know each stock is different and this concept provides some sort
of structure to when to take profits or when to wait on the side lines.
We will
look through history with the stock price. There are some problems with this in
that the volatility of the stock can change through time. So to help reduce
that difference, we have provided a min movement figure and the idea is that
this will capture even the movement when the volatility is low.
We also
need to create and turn it from theory into a trad-able point of view. Information
on how much money can be made and what is the probability of the investor
making an amount of money.
To begin
with we will look at higher highs or higher lows with a holding period of 10
days. What this means is that when the stock is moving higher with higher highs
or higher lows from the signal date. From the Signal date, we will study the
next 10 days to find the highest high and the lowest low for our analysis. The
signal date we use is the high price of the signal date, to the highest high in
that 10 day period to find out the statistics on a trend continuation and for a
trend reversal we use the low of the signal day, and then find the lowest low
within that next 10 day holding period. There is no logical use for a 10 day
period nor optimization used for the holding period, it just gives the stock an
amount of time to move.
Whilst
there are times in history where the stock has run up with a greater number of higher
high or higher lows we have selected the run up based on where in history the occurrences
were greater than 10. To give perspective if you have say 9 higher highs or
higher low consecutive bars there will be less times in history that occurred. Whereas
a bar count of 4 is a lot more common. So to make it trade-able we need a high
amount of occurrences and also it will provide more accurate statistics as we
are dealing with a large number of occurrences. For statistics we need a high
number of occurrences to provide some sort forward guidance.
Symbol
|
Bar
Count
|
Occurrences
|
Stat
Trend Continue(%)
|
Min
Mov(%)
|
Avg
Mov(%)
|
Stat
Trend Reverse(%)
|
Min
Mov(%)
|
Avg
Mov(%)
|
AAPL
|
4
|
170
|
59.7633
|
0.0790
|
5.5000
|
98.2249
|
0.0170
|
7.9000
|
EWA
|
5
|
62
|
57.3770
|
0.1000
|
2
|
100
|
0.0980
|
3.3000
|
BA
|
6
|
74
|
54.7945
|
0.1300
|
3.3000
|
100
|
0.0300
|
4
|
TLT
|
8
|
20
|
68.4211
|
0.3500
|
2.3000
|
100
|
0.0670
|
1.8000
|
TSLA
|
5
|
22
|
52.3810
|
0.5500
|
5.6000
|
100
|
0.2900
|
9.2000
|
SPY
|
5
|
92
|
65.9341
|
0.0920
|
1.2000
|
100
|
0.0890
|
2.4000
|
Systematically
going through the data above the reader can observe that using the one date we
can identify that these different stocks have different bar counts. This means
that currently AAPL has a 4 day count where it has higher highs or higher lows.
With AAPL looking over the history of the stock this 4 bar count has occurred
170 times. Reading along that same line the reader can note that for AAPL there
is a 59% probability of the trend continuing.
To clarify, as we are looking at the next 10 days after the signal date
(which is a 4 bar count) the trend continued in some sort amount 59%. Excluding
negative numbers the min return is 0.079%. To put figure in perspective and
based on the day or writing this article the share price high was $119.43,
there is a 59% probability that the share price will move a MIN amount of
0.079% to $119.52 over the next 10 days. The Average move after a 4 bar count
is 5.5%. To put that into perspective, there is 59% probability that the Average
share price will move from $119.43 to $125.99 over the next 10 days.
Moving
along the same data we come to Stat Trend Reverse for AAPL of 98%. This means
that over the last 170 occurrences that AAPL had a reversal within 10 days from
a 4 bar count. The MIN movement for AAPL for a reversal was 0.017% making the
reversal from the low of today’s data which is $117.94 to the MIN historical
low price movement to $117.92. The average movement coming in at a low of 7.9%
or $108.62.
So to
really capitalize on this concept further the trader can look for stocks where there
is a high probability of reversal or trend continue, and also look for stocks
with a High Min share price movement.
Depending
on the traders style of investing this is all interesting data. One of the take
always is that based on the data output as the bar occurrences increase, the
probability of the trend continuing, on average, decreases. This is nothing new
every trader/investor knows this. But the point of the article is to provide
context and provide a tradable opportunity. The higher the bar counts the
higher probability that the stock will see some sort of pullback within 10
days. This pullback probability increases to 100% quite quickly. What it
clearly shows is that there is opportunity for gains using the correct trading
methods.
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