Cycles, rhythms, patterns, and seasons...no matter what you call them they are there in the markets. One market in particular is the Nasdaq and today I've invited Steve Hoven from NasdaqProfits.com to give us his insight into the patterns of the Nasdaq. If you have any other patterns you'd like to share please do so in the comment section and be sure and visit NasdaqProfits.com to check in on what he does!
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The Nasdaq Index is over 30+ years old.
Yet did you know that over those 30+ years on the date July 9th, the Nasdaq finishes the day UP over 85% of the time. That is right- since the early 1970's when the Nasdaq began, it has been open 27 times on date July 9th and out of those 27 times, the Nasdaq has finished in the Positive 23 times and DOWN only 4 times.
(of course July 9th sometimes falls on a Saturday/Sunday when the markets aren't open so that is why you only see 27 trades instead of 30+)
Pretty interesting stuff isn't it. I love stats myself.
But before you write that off as some hokey thing, there are MANY other examples I will give you in just a minute. Before I do though I wanted to give you another stat.
Between the years of 2000 and 2003 the Nasdaq went from 4135 to start the year 2000 and closed the year 2002 at 1335. So in 3 years of Nasdaq trading, the Index LOST a STAGGERING 68% of its value!
That is a huge drop and has been talked about at great length but I wanted to share with you a break down of the years 2000 through 2002.
The Nasdaq in the year 2000 had 122 UP (positive) days and 130 DOWN (negative) days
The Nasdaq in the year 2001 had 125 UP (positive) days and 123 DOWN (negative) days
The Nasdaq in the year 2002 had 117 UP (positive) days and 135 DOWN (negative) days
So in over 750 trading days where the Nasdaq LOST 68% of its value, the Nasdaq STILL had 48% of its trading days end in the Positive.
Now of course the down days were MUCH bigger then the UP days; I am not discounting that. However there are opportunities to place LONG trades even in a MAJOR bear market. If you knew when the Nasdaq has a historical rate of closing the day UP 70-80% of the time on a specific day, don't you think that can be valuable information? I know I do.
If shopping for a mutual fund do you look at the ones that historically have done well or the ones that haven't? Of course you pick the ones that historically produced well. It shows that management knows what it is doing with its investments. Does it mean they will continue to get those results in the future? NO, but they use it in their ads: We have been up X% over the last 5 years or we beat the S&P by X% over the last 10 years.
When a sports franchise looks to hire a new coach do they look for one with a losing record or one that has proven he has won in the past? Of course they go with a coach who has proven he has won in the past. Does that guarantee future success for the franchise? Of course not but the ownership feels it is giving itself the BEST opportunity to win.
Does past performance guarantee future results? Of course not. But we do use past information all the time in our life. Well, now we can use it for trading the Nasdaq with historical stats of over 30+ years of trading. If you knew a trading day finished UP historically 75% of the time, which direction would you want to put your money on? UP of course. Does that mean it is guaranteed to go UP? NO, but historically 3 out of every 4 trades finished UP. I like putting the odds in my favor. You can use that information in your stock trading as well when the market may have peaked etc...
Well, you can say "Well the Nasdaq started at like 100 and peaked over 5000 so of course there are going to be a lot more up days than down over the history of the Nasdaq." And you know you are probably right, but do you know what? There are historical stats that show certain days the Nasdaq finishes DOWN on that day as well. On June 18th for example the Nasdaq finishes DOWN (negative) for that day historically 70% of the time!
Okay. Hopefully in this short article I have convinced you that historical stats can be a way to trade the markets. Here are some of the additional examples that I promised you.
TODAY November 5th historically the Nasdaq finishes UP (positive) on the date November 5th 78% of the time!
November 24th finishes UP (positive) historically 80% of the time.
November 25th finishes UP (positive) historically 70% of the time.
Steve Hoven is an experienced Trader and has been trading various instruments for over 17 years.
If you would like all the stats for the entire YEAR. Go to NasdaqProfits.com
Yesterday Nov 11th. Was a 69% Up day as well on the Nasdaq finished up 15 points on the Nasdaq.
Check out the site.
Take care
I agree...but we should all remember: When you jump out of a plane without a parachute, you are perfectly safe 99.9999% of the time!
Be wary of statistics.
Any time you use randomness and come up with stats that support an up or down move, they are great to have in an arsenal of many tools, preferring to watch for a break to the up or down side according to history but filtered by the other indicators and price action that is in front of you for that particular day. If it is a 78 % up chance, then your other filtering could keep you out of the trade should it be one of the 22% where you could lose......and by how much?
I agree Dave. Not a bad tool to add to an arsenal. I actually use a 3/6/and 18 day MA combo and I bought some Q's options. Dec 45 calls for .80 this morning. never trust anything fully but sometimes the planets just line up and if you're home to catch it all , it can be sweet. PS: The 3/6/18 was used by a champion trader named ED Burke. Unreal I have to say. Most indicators lag but this combo used when the 3 crosses the 6 (whether up or down) tells you when to get in and when to get out. They don't lag. Any time frame but I like the weekly 3 momth chart. Back test all you want. It's extremely reliable.
By the way, Fooled By Randomness is one of the best and most entertaining books ever showing the folly of pattern trading. You can apply the author's logic to, say, natural gas trading where the price will either go UP, DOWN or Sideways. A trader at Amaranth bets on UP and makes a fortune because of hurricanes in the Gulf. Suddenly he's being interviewed on TV, getting his own trading office in his home town, and being profiled in Trader magazine as a wunderkind with a picture showing the young protege at his first lemonade stand. All because he got a 1 in 3 bet correct. And as we know, the same bet the next year brought down the entire multi-billion dollar Amaranth hedge fund. Even a blind squirrel finds a nut. Be careful of what you consider to be a repeating pattern.
Jesse Livermore said 100 years ago, "Never confuse brains with a bull market."
Here's an experiment for you. Go to a gambling web site that offers play money. Play roulette using mean reversion as your methodology. In other words, if you hit an anomoly where one number/color/section is favored for any length of time, bet the other side. If you lose, double your bet. If you lose again, double it again. About 7 times out of 10 you will take your free $1000 bank roll and run it up to $100,000. But if you keep playing, you will go broke. A lot of times I hear a trader using a methodology successfully that goes counter to what the best trader/investors do. My conclusion is always, "You haven't made enough trades yet."
Hmmmm, those were Yale undergraduates, after all. Too many disputatious New Yorkers in their midst, and they get bored if they don't have homework to argue about. The George Bushes attended Yale. Their family's three administrations in the presidency proved that they did not study economics while at Yale, or at least did not learn any if they had studied it. On the other hand, late 19th century, early 20th century social scientists at Harvard, not to mention B.F. Skinner in the 1960's and 1970's, tended toward a deterministic theory of behavior, as if we react by merely biochemical responses, as though we humans do not learn much beyond the rat confrontation with the elite Yalies. (8-)
I will buy the books and read them. I am always looking for the one, reliable method to build on. On the other hand, we are already blessed with the excellent foundations of Messr. Hewison and his outstanding team.
Mr. Steve Hoven
Dear Sir:
Using your figures, which were 364 positive days and 388 negative days, I arrived at a total of 752 days that you used in youe example. By simple math division I find that 364 & 388 divided by 752 equals 48% & 52% for the positive and negative days in question - not 68% & 48%. 2nd and directly to the point is that when I divide 364 days by a 48% gain AND 388 days by a 52% loss I discover that the answer in both cases is exactly 7.52%; there was no difference whatever in gains compared to losses. That amounts to a coin flip at odds of 50-50 - no advantage at all. I am NOT a math person, but the unusual can catch my eye. Now when OR IF you can adjust those odds to 3-1 in my favor I invite you to call me right away,actually IMMEDIATELY. You are not ever going to see my money laid down on anything less !!! The figures you used gave back every $ made, thus it was possible to work for 2 years for free, well the broker didn't but the trader would have. I smell a loss in all that; let's change the aroma ! Best regards, Dean
Dean, the 68% I reference is the fact that the Nasdaq index FELL 68% during those 3 years.
So even though the nasdaq lost 68% of its value, the index itself had 48% UP days during that time.
Yes, but here the question is, not can you outsmart the rat (see Feynman on that one, in the cargo cult lecture, it's truly good), but other humans. Individually, they're not real predictable unless you know them well, but crowds are another thing altogether. And while I can't always get the rat, I get the humans often enough.
Predicting the markets these days is simpler than normal. There's so much panic in the air, it's like the little girls all run to one side of the boat, then notice the boat is tilting (due to that), so they all run to the other side and shift the boat that way -- all you have to do is get on the other side from them to do well. And that's one of my more successful models for it. These little girls may look like cigar chomping fat old farts, but that's how they act. As someone mentioned above, for example if a stock starts a move, that drags the fan boys in and the move gathers steam.
So, go along for the ride, but watch your back, this kind of thing is for those of us who sit here all day and pay attention all the time.
Dave, when I can take my GM stock (luckily don't have any just now, but playing it both long and short recently netted me a new Camaro SS, for fun) and demand a drill press from the factory in exchange, I'll believe that this is anything other than human emotions moving bits (not even paper anymore) around at purely human-perceived values, not fundamental ones. The market only touches fundamentals when there's no choice for it. Most of the indicators work because enough people do to base trading decisions on them, and therefore aren't science as such, but simple self-fulfilling placebo effect. Do you care? I don't as long as they work, not that it doesn't help to understand why sometimes.
Else you cannot explain why dow was at 14k plus awhile back and didn't go to 5k. Think about it, all that disappeared was some fake money coined as CDS etc, and now the printing presses can't run fast enough to make up for the fake money that went away (they'll catch up which is why Adam is saying get into gold) -- houses built during the boom are still built. But did anybody lose their abilities? I didn't, I'm just as good a scientist as I was before, own the same tools and land, and so on.
So, dow was too high on hubris, then too low on panic, and so we try to find fundamentals again, about once per decade or so. Won't stay there long.
The rest is just the old human comedy, and that's (sadly) pretty predictable.
As Isaac Asimov said, in crowds, psycho-history is easy. He was right.
Steve,
I hope no newbies are drawing large conclusiona from what you've written here. To use the number of UP days versus DOWN days sets an extremely dangerous precedent on which to base trades. Some of the world's wealthiest traders are right only 40 - 60% of the time. But what they make on their right calls far exceeds what they lose on their wrong calls. The discipline to recognize a loser and sell it off quickly makes the difference.
I would be concerned that someone reading your stats and your statement that it is possible to go long in a bear market may be stacking the odds against himself. The graveyards are full of intelligent traders who thought they were smarter than the market.
Good advice, I'm a newbie that will keep this information on the back burner.
Not saying just because something has an 80% historical success rate that it will in the future. I was very clear to say that wasn't the case.
But you can also use trendlines support resistance etc.. Or whatever indicator you use. Nothing is accurate 100% and I am not saying this will be. But I do think it is interesting the stats and the #'s don't lie what conclusions you want to draw is up to you. I have used these stats to make some good money. Have I had my losses YOU BET.
But I do think its valuable information that can be used in a persons trading. Each person is different though that is what makes the markets go up and down.
You can have 3 people look at the exact same chart and they all put their indicators and price action analysis on it. One will say its going up the other say going down and the other sideways. Their is NOT 1 way to trade. And I didn't claim this to be a holy grail. But I do see the benefit in it as others have as well.
You can use statistics to exploit the market when you trade. I do this with RIMM and AAPL on a regular recurring basis.
From statistics I know that if these stocks go up a dime, they will usually go up 50 cents or more from the open price. I also know that "fading the gap" can be exploited.
I have read FOOLED BY RANDOMNESS, THE BLACK SWAN and also HOW WE DECIDE. These books inspired my latest method, the "rat reversal".
“Look, for example, at this elegant little experiment. A rat was put in a T-shaped maze with a few morsels of food placed on either the far right or left side of the enclosure. The placement of the food is randomly determined, but the dice is rigged: over the long run, the food was placed on the left side sixty per cent of the time. How did the rat respond? It quickly realized that the left side was more rewarding. As a result, it always went to the left, which resulted in a sixty percent success rate. The rat didn't strive for perfection. It didn't search for a Unified Theory of the T-shaped maze, or try to decipher the disorder. Instead, it accepted the inherent uncertainty of the reward and learned to settle for the best possible alternative.
The experiment was then repeated with Yale undergraduates. Unlike the rat, their swollen brains stubbornly searched for the elusive pattern that determined the placement of the reward. They made predictions and then tried to learn from their prediction errors. The problem was that there was nothing to predict: the randomness was real. Because the students refused to settle for a 60 percent success rate, they ended up with a 52 percent success rate. Although most of the students were convinced they were making progress towards identifying the underlying algorithm, they were actually being outsmarted by a rat.”
P64 HOW WE DECIDE
That is very interesting, thank you I'm going to purchase these books.
IS THIS STRICTLY A DAY TRADING STRATEGY?
Yes the Nasdaq stats I provided are for just that one day.
When I was in graduate school I jokingly asked my engineering mathematics professor on the first day of class if he was going to teach us analytical methods that would allow me to conquer the DJIA with foolproof predictability that will make me rich. He replied by saying that would be impossible, since every day in the markets, every pricing and selling and buying decision was an independent event--not random, but independent. Notwithstanding limit moves and other regulatory controls imposed by the exchanges, every day in the markets is a new, detached set of independent decisions. Plenty of theories have been expounded about randomness in the markets, as measured by stochastics, so I am not about to debate any of those. Nevertheless, history may appear to repeat itself in time series price movements, but they are not always precisely predictable. Independence of momentary pricing decisions is indeed conditioned by anticipation of future events, and by decisionmakers who believe current market conditions resemble present market conditions, but ultimately the collection of pricing decisions established in a market are more independent of past history than not. This type of independence is a little more discernible in the volatility of interest rates and crude oil and precious metals, which are highly socio-political markets, and in commodity sectors like orange juice, for example, which are highly susceptible to daily weather. Jake Bernstein has written amply about conformable trends in futures based on seasonal patterns, like the agriculturals or heating oil, but they will always bear significant stochastic components, which is why producers still rely on futures markets to transfer their financial risks to speculators like you and me. While historian Arnold Toynbee wrote that human history is ultimately unique, economists like Arthur Laffer (of Laffer-Curve fame) and Nobel Prize winner David Tobin (Yale) have written about the discernible patterns of repeatable human economic behavior that help us to understand ourselves better and make economics work better for all. As my dear friend, Tucker Hart Adams (Ph.D., Wellesley), Chief Economist at US Bank, once told me, "The purpose of mathematical economics is not to predict the future, but to help us understand economic behavior better so that we can improve the system for the betterment of all." All speculators who approach the markets with full confidence in their ability to depart from the markets richer than they approached them would be well reminded of what the Great Wallenda used to shout to his audiences before every high-wire performance, "Ladies and Gentlemen, my next act is immpossible!" Then the Great Wallenda would dazzle his audiences with performing his seemingly impossible feats of acrobatics.
Easy to be fooled by randomness, but here in the markets it's largely about psychology and expectations -- the non random human behavior model.
I don't think some of the indicators I use here are magic, but I know that many others base their decisions on them -- so they work for me even if they don't really work in some scientific sense (and I'm a scientist and know the difference).
YES, .... this DATE is correct, ... 24/25-NOVIEMBRE-2009.
But the exact procedure is other.
Taleb say the "improbability", but not the "posibility".
In others words, is a matter of knowledge & information.
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OTRAS FECHAS PROXIMAS:
1- 17-april-2010 (very - hot - ping, pang, pung, & very sad)
2- MAY-2011-REVOLUTION, where, .. is secret.
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Adeu from barcelona
Have you never read Taleb's book "Fooled by Randomness". This is a classic case of the narrative fallacy or using random historical patterns as a way to predict a fundamentally unpredictable future. The Nasdaq having a historical rate of closing the day UP 70-80% of the time on a specific day does NOT mean there is a 70-80% chance of the Nasdaq closing up on that specific day in the future. This information does not put the odds in your favor.
Again you use Randomness in many things. As you do in the mutual fund explain and sports teams. NO ONE can predict the future. But people do use it in every day lives.
The Nasdaq is RANDOMLY up 46 points at 11am.
thank you for your information we are still on line with you always and we are waiting for you to come our aid sooner we will start this business as its to
ld and beleive for one year now we are still with.
thank you.