Simple Technique to Predict the Daily Close

A Simple Technique to Predict the Daily Close

Scott Andrews

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

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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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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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Gaps down 1%

But where did it close?


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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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Simple Technique to Predict the Daily Close