Determining Daily Intra-Day Direction – Is it possible?

Determining Daily Intra-Day Direction – Is it possible?

Order of End of the Day Math

The math works in a logical sequence, as one would expect, for most markets.  50% of the time, a market’s Open and Close are within 50% of the entire day’s range from each other.  50% of the time, the day’s Open and Close are more than 50% of the entire day’s range apart from each other.  Therefore, if one could estimate how large, the day’s range will be, he / she would be able to determine the market direction 50% of the time.  While this concept is very intriguing, let’s assume that the Open and Close appears in close proximity to each other, given the entire day’s range.  This creates a situation where one would certainly want to trade a Reversal or Mean Reverting Strategy, because the overall tendency of the market would be for the Open and Close to be near each other.

Daily Range

The overall daily range is important as we must have something to work with.  When analyzing stocks / markets that do not move a reasonable distance in price (less than 1.00 from High to Low), I have found these methods are not of much help in determining daily direction.

The Intra-Day Momentum Method

Taking these factors into consideration I have developed a method for determining daily direction that allows me to ascertain with a reasonable degree of certainty intra-day market direction.  When developing this method for determining daily direction, I created directional price levels using mathematical equations, so that I could determine the probabilities of certain events occurring.  I found that for the most part, as a market moves in one direction, the higher the probability it will close in that direction.  This finding raises another question all together: “Do profit targets actually help or hurt overall performance?”  When creating the Intra-Day Momentum Method, I found a calculation that allowed me to determine daily direction with historically a 50% success rate that many markets would close above this number.  I found that it typically takes a larger move to the downside for a market / stock to confirm daily direction Down, than it typically does to confirm a daily direction Up.  The 50% phenomenon confirms that stock behave differently in expansions and contractions.  An understanding of a stock’s behavior can be enhanced by defining when a Long or Short day may occur as defined by chart patterns.  Also, it is possible to define when a reversal may be likely due to specific price patterns that occur on daily charts.  When developing the method, I initially found calculations that historically allowed for a reversal approximately 30% of the time, across many markets (once again, Market-based ETF’s historically had a much larger % of reversals).  A reversal is defined as a day where both the Long Level Up and the Short Level Down are reached in the same day.  My revisions allowed me to create a better scenario where I cut the historical probability of reversal to less than approximately 25% for many stocks.