Simple Technique to Predict the Daily Close

A Simple Technique to Predict the Daily Close Scott Andrews

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. 2 Copyright 2013-2014, ClosingOdds.com. All Rights Reserved.

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)

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What Were You Thinking? (or what would you have been thinking?)

Example: February 22 Closes up 1%

If you were short, what were you thinking? If you were long, what were you thinking? 5 Copyright 2013-2014, ClosingOdds.com. All Rights Reserved.

The Next Day: What Would You Do? Gapped up ½%

But where did it close? 6 Copyright 2013-2014, ClosingOdds.com. All Rights Reserved.

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! 7 Copyright 2013-2014, ClosingOdds.com. All Rights Reserved.

Example: June 22

If you were short, what were you thinking? If you were long, what were you thinking? 8 Copyright 2013-2014, ClosingOdds.com. All Rights Reserved.

The Next Day: What Would You Do? Gaps down 1%

But where did it close? 9 Copyright 2013-2014, ClosingOdds.com. All Rights Reserved.

The Next Day: What Would You Do? Gaps down 1%

Closes down another 1.5% !

If you were short, the right decision captured another 1.5% after the open 10 Copyright 2013-2014, ClosingOdds.com. All Rights Reserved.

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 11 Copyright 2013-2014, ClosingOdds.com. All Rights Reserved.

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

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) 15 Copyright 2013-2014, ClosingOdds.com. All Rights Reserved.

But Position Relative to the 10 DMA Is Very Important Above 10 DMA

Below

10 DMA

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But Position Relative to the 10 DMA Is Very Important Above 10 DMA

Odds of Closing Higher: 1) HIGHEST if gap is LARGE & UP & < 10 DMA Below

2) LOWEST if gap is LARGE & DOWN & > 10 DMA 10 DMA

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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)

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.) 20 Copyright 2013-2014, ClosingOdds.com. All Rights Reserved.

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 Closed Up > 1% above the open

October 10th open: 1667.50 (Gap up > 1%)

Gap direction, size and market conditions are extremely powerful for determining the historical closing bias 22 Copyright 2013-2014, ClosingOdds.com. All Rights Reserved.

“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 ….

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) 24 Copyright 2013-2014, ClosingOdds.com. All Rights Reserved.