SPY Quant V 0.01

$SPY Quant-High
Probability Trading Setups

on SPDR S&P 500 ETF
($SPY)
More than 40 mechanical, statistically
significant, trading strategies with simple
mathematical formulae
Kora Reddy
Co-Founder , paststat.com
Table of Contents
DISCLAIMER........................................................................................................................................... 5
FEEDBACK ................................................................................................................................. 5
ACKNOWLEDGMENTS .............................................................................................................................6
INTRODUCTION ....................................................................................................................... 9
SHORT TERM TRADING ICE BREAKER ................................................................................... 13
SHORT TERM TRADING RULES .............................................................................................................. 16
INTRODUCTION TO BACKTESTING METRICS .......................................................................23
IMPORTANT METRICS TO CONSIDER IN THE BACKTESTING ...................................................................... 23
Backtest performance summary of buying SPY every day at close and exiting next day at close .. 31
DATA SOURCES AND DATA NORMALIZATION ..................................................................... 34
DATA SAMPLE ...................................................................................................................................... 35
% PLAYS ................................................................................................................................... 36
4% CRASH ON SPY ............................................................................................................................... 36
Trading strategy rules ................................................................................................................... 36
Example trade................................................................................................................................ 36
Backtest Performance Summary ................................................................................................... 36
Historical trade details .................................................................................................................. 37
4% RALLY ON SPY ............................................................................................................................... 38
Example trade................................................................................................................................ 38
Backtest Performance Summary ................................................................................................... 38
MONDAY 2% DIPS ON SPY ...................................................................................................................40
Example trade................................................................................................................................ 40
Backtest performance summary.................................................................................................... 40
Historical trade details ...................................................................................................................41
MONDAY 2% DIPS ON SPY VARIANT .................................................................................................. 42
Example trade................................................................................................................................ 42
4 DOWN DAYS ON SPY AND TODAY IS FRIDAY........................................................................................ 44
Example trade................................................................................................................................ 44
4 DOWN DAYS ON SPY AND TODAY IS FRIDAY - VARIANT .......................................................................46
Example trade................................................................................................................................ 46
3 DAY RALLY ON SPY AND TODAY IS FRIDAY .......................................................................................... 48
Trading strategy rules....................................................................................................................48
Example trade ................................................................................................................................48
Backtest performance summary ....................................................................................................48
Historical trade details ..................................................................................................................49
MONDAY 1% DIPS DURING LONG TERM UPTREND ON SPY ...................................................................... 50
Trading strategy rules.................................................................................................................... 50
Example trade ................................................................................................................................ 50
Backtest performance summary .................................................................................................... 50
Historical trade details ...................................................................................................................51
BACK TO BACK 1% DROPS ON SPY ON MONDAY ..................................................................................... 52
Example trade ................................................................................................................................ 52
MONDAY 2% DIPS DURING SHORT TERM DOWNTREND ON SPY .............................................................. 54
Example trade ................................................................................................................................ 54
MONDAY 2% RALLIES DURING SHORT TERM UPTREND ON SPY ............................................................... 56
Example trade ................................................................................................................................ 56
OVERNIGHT EDGE WHEN SPY GAINS MORE THAN WHAT IT HAD LOST DURING PREVIOUS DAY .................. 58
Example trade ................................................................................................................................ 58
Historical trade details ................................................................................................................. 60
3% INTRADAY BREAKOUTS ON MONDAYS AND TUESDAY ........................................................................ 61
Example trade ................................................................................................................................ 61
GAP PLAYS ................................................................................................................................63

MONDAY UNFILLED FULL GAP DOWNS................................................................................................ 64
Trading strategy rules....................................................................................................................64
Example trade ................................................................................................................................64
Backtest performance summary ....................................................................................................64
TUESDAY 0.5% UNFILLED GAP UPS...................................................................................................... 66
Trading strategy rules................................................................................................................... 66
Example trade ............................................................................................................................... 66
Backtest performance summary ................................................................................................... 66
MOVING ONTO INTRADAY TRADING STRATEGIES: 1% FULL GAP DOWN OPENINGS ................................... 68
Trading strategy rules................................................................................................................... 68
Example trade ............................................................................................................................... 68
Backtest performance summary....................................................................................................68
1% GAP AND GO ON TUESDAYS ............................................................................................................. 70
Example trade................................................................................................................................ 70
Historical trade details ................................................................................................................... 71
1% FULL GAP UP OPENING, FADED BY OTHERS ........................................................................................ 72
Example trade................................................................................................................................ 72
NARROW AND WIDE RANGE BARS ........................................................................................................ 74
SEASONALITY ...........................................................................................................................75
AS SEPTEMBER GOES.......................................................................................................................... 75
FEBRUARY EFFECT ................................................................................................................................ 75
SAYONARA............................................................................................................................... 76
RAISING FUNDS FOR BRIGHTER FUTURES ................................................................................................ 76
GLOSSARY.................................................................................................................................77
Copyright @paststat
ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a

retrieval system, or transmitted, in any form or by any means, electronic, mechanical,
photocopying, recording, or otherwise, without the prior written permission of the
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This publication is designed to provide accurate and authoritative information in regard to

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Authorization to photocopy items for internal or personal use, or in the internal or

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Disclaimer
It should not be assumed that the methods, techniques, or indicators presented in this
book will be profitable or that they will not result in losses. Past results are not necessarily
indicative of future results. Examples in this book are for educational purposes only. The
author, publishing firm, and any affiliates assume no responsibility for your trading
results. This is not a solicitation of any order to buy or sell.
The NFA requires us to state that HYPOTHETICAL OR SIMULATED PERFORMANCE

RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL
PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL
TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE
RESULTS MAY HAVE UNDER- OR OVERCOMPENSATED 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 PROFITS OR LOSSES
SIMILAR TO THOSE SHOWN.
Feedback
If you have feedback for us good or bad, feel free to drop me a line or two @
paststat@gmail.com
Once again, thank you for purchasing this book! I wish you loads of luck in markets
-Kora Reddy
Acknowledgments
Err, have you counted and tested that?
Victor Niederhoffer
When someone suggests a trading idea, always ask the above question. I owe an
appreciation and indebtedness for this theme, i.e. to count and test to Victor Niederhoffer.
The whole idea of this book is to test and count every market hypothesis as Im a firm
believer that every trading idea must be quantified and tested for its veracity.
I also feel a debt of gratitude to so many professionals. I am thankful for their marvellous
work in offering education for traders -- you are an asset to the world of trading. It would
be foolish and amiss of me not to mention that parts of this book are heavily influenced by
market wizards and selfless teachers, such as Toby Crable, Larry Williams, James Altucher
and Andrew Goodwin.
Some of the trading strategies presented in this book are fished, either directly or
indirectly, from the web blogs/RSS sites that I regularly visit, such as
- Brett Steenbargers Trading Psychology www.brettsteenbarger.com
- Franks http://www.tradingtheodds.com
- Jeff Boarman's http://ibankcoin.com/woodshedderblog
- Jeff Swanson's http://systemtradersuccess.com
- Michael Stokess http://marketsci.wordpress.com
- Oddmund Grtte's http://www.quantifiedstrategies.com
- Paul Hickeys http://www.bespokeinvest.com
- Rennie Yangs http://markettells.com
- Rob Hannas http://quantifiableedges.blogspot.com
- Ryan Detrick http://schaefferstradingfloor.com
- Scott Andrews http://www.masterthegap.com
- Tadas Viskantas Abnormal Returns www.AbnormalReturns.com
- Trading Markets www.TradingMarkets.com
& RSS aggregators
- http://www.thewholestreet.com
- http://www.wallstreetcurrents.com
- http://www.kirkreport.com
& finally Stock Twits, the social networking for stocks, especially those handpicked tweets
with $STUDY hash tag from the editorial staff http://stocktwits.com/symbol/STUDY
Dedicated to YOU
The buyer of this book

Introduction
The following three motives are behind for writing this book.
A well-known Chinese proverb says, Give a man a fish and you feed him for a day. Teach a
man to fish and you feed him for a lifetime. My goal is to provide you with the knowledge
and a framework so that you can add what you learn in this book to whatever trading
approach you are most comfortable using. I believe that an understanding of learning the
patterns described in this book will give the trader a great edge, as well as reduce the stress
arising from a hit and miss approach based on in without adequate knowledge of market
behaviour. The ability to look at the market and to have confidence in your trading
decisions is worth its weight in by gold.
In life everybody has goals -- I must get an educational degree, I must get a job, I must
marry, I must have children, I must have a house for myself, and so on. Soon these end up
as a list of 50 or 100 must-have, must-do things. One such aim of mine was is to write a
book on a subject that I am passionate about, a book on trading. Last, but not the least, I
cant deny that the possibility of fame and money from a successful book are attractive as
well.
What you will learn from this book
All said and done, market analysis is not some complex rocket science; all that is needed to
make sense of the evolving price data is fairly simple knowledge and some experience. This
book is about price patterns and the overall behaviour of the market. Some of the patterns
aid you in understanding the market behaviour and will enable you to see the current
market action and assess, with a high degree of reliability, what is likely to happen next.
This book is not meant to be a road-to-riches book or a no-risk type of book. You should
be ready to put in serious effort, requiring both study and concentration. As you read
through the book and study the examples and explanations, you will quickly realize the
tremendous value of the information it contains.
There is an old adage which says that knowledge can be communicated but wisdom has to
be self-taught. Hopefully, this book will change the way you look at investing and trading,
and will give you the tools you need to develop trading systems that work for you.
What you will not find in this book.
No Gann, no divergences, no chart patterns , no pennants , no trend lines , no

Fibonacci retracements , no Elliott waves - nothing that relies on subjective
judgement.
No guarantees of great wealth in a short time with little effort.
No investment advice. This book is intended to be an educational text. Trading
strategies described are meant to be examples which readers can experiment with,
expand and develop for their own use.
No pricing of exotic derivatives. This is elementary quant analysis.
No vague trading strategy statements. We are regularly frustrated by advertising or
jacket copy that tells a book explains 25 profitable trading systems in complete
detail, only to find a few hand drawn charts, and incomplete set of vague entry
rules and no performance summary. It is our sincere hope that none of you feels
this book falls into that category
How to use this book
This book will immediately benefit the trading enthusiasts. Keep observing the market
every day during and after studying the book, and you might find fresh examples of the
trading patterns covered in this book in the ongoing market action. The best results will
come when the reader practices these patterns through actual trade execution. Experiment
with the new concepts and add them slowly into your trading strategy. They will open up
new tactics and build confidence before firing a trade. With more practice you will be able
to find some additional patterns as well; the patterns are there, just waiting to be
uncovered.
In order for you to get the most out of trading these setups, a few points need to be
covered:
It is important to initially trade a new concept or strategy on paper. Only by seeing

a pattern over and over again will you truly feel comfortable with it. You must
believe in its ability to repeat itself. Don't be surprised if you find yourself actually
becoming excited as you see the patterns begin to set up.
If a pattern does not make sense to you, don't trade it. If you don't have a 100
percent belief in it, you will not be able to overcome losing streaks.
All you need is one or two trading patterns to make a living! Learn first to
specialize in doing one thing well.
The markets can only be exploited when there are inefficiencies. That said, there are a
lot of smart people trying to find those inefficiencies, and when they occur, they just as
often quickly disappear. The inefficiencies that are exploitable, year in and year out,
and even decade after decade, are those that have deep roots in the fear and greed that
drive investors and gamblers alike to the worlds markets. Keeping this fact in mind
will ultimately lead to your own trading ideas that can be used to trade the markets.
Whats in this book?
The book is organised into the following major chapters:
Introduction to backtesting metrics

% Plays
Pivot Points
Laps and Gaps
Seasonality Plays
Highs and Lows
Volume
VIX
Inter-Market Relationships
Economic Data Releases
Other Short Term Trading Patterns
I have tried to write this book in a simple language. I did not want the readers to be
overwhelmed by off-putting market jargon. Readers should be able to reasonably replicate
the results of the trading strategies listed. I hope the reader will pardon me if at any place
in this book I have veered away from that intent.
Why no pictures in this book?
It is belief of mine that if there is some predictive value to a chart or picture, then the
numbers that create the charts will contain that information. I do believe that prices
contain predictive significance, and prefer to work with the highs, lows, opens, closes and
volumes, of the daily prices that go into the charts.
Why write this book instead of trading our own account.
There is always the question I wonder when I read investment books: If these systems are
so good, why not just use them to print money all day long? Why write about them?
Well, I have several answers. For one thing, I have learned a lot during the process of
researching this book. Although I have been using many of these systems for years in
various markets, there are always new subtleties, new twists, in every system. Despite
being a systematic trader, I am a personal believer that it is impossible to just rest on your
laurels and use a black box that prints money forever. Every system needs to be constantly
researched and further developed, new avenues explored, former old paths disbanded.
System development and trading is a constantly evolving process. It is that process of

continual development that makes someone a successful systematic trader, not the
systems themselves.
The markets are a very big place with many hidden pockets of inefficiency. And yet those
pockets are constantly changing. I think the ideas in this book are great places to start
when looking for further inefficiencies, and I think the ultimate success readers will enjoy
is when they start finding those inefficiencies for themselves.
In addition, I like to correspond with an interested community of other developers,

traders, and researchers. Unlike many people I do not believe that the sharing of systems
(in most cases) degrades the system. Every year trillions of dollars are put to work in the
markets. There are trend followers, countertrend followers, buy and hold mutual funds,
day traders trading off gut, and thousands of other types of traders and system followers
out there.
No matter what system you have or approach you use, it is a guarantee that there is
someone out there more than happy to fill your trade in general. By sharing ideas with a
community of interested parties, I hope to learn from their ideas as well. The saying, give
and you shall receive certainly applies here.
Finally, I like to write. I hope people enjoy reading what I write.
Short Term Trading Ice breaker
What draws people to short term trading?
Here are some reasons that I can readily think of:
Lower trading commissions
The commission structure in short term trading is very low compared to trades taken on a
delivery basis.
Increased leverage
Short term traders can avail of as much as four times (Ive taken a low end figure, there are
brokers who offer much more than 4X leverage) their equity as buying power. Used wisely,
this margin can potentially increase their profits quite substantially. But leverage, or
margin, is a double edged sword; for increased leverage makes day trading very risky,
especially if one scores poorly on the three key attributes of discipline, risk management,
and money management.
Profit in either market direction
Short term traders often take recourse to short selling to take advantage of declining stock
prices. The ability to profit even when markets fall during the trading day can obviously be
extremely useful, particularly during bear market conditions.
Why day trade or indulge in short term trading?
The most apparent answer to this basic question is quite simple: To make money.
The profit potential
This is by far, the most obvious reason. In ES Mini futures (when S&P 500 Index is trading
around 1500 levels), the quintessential trader if can catch a swing of 1%, is translated into
roughly 750 USD profit by trading just one future contract. Now imagine with the Initial
and Maintenance margin requirements of $5,625, and $4,500, that 1% swing translates into
more than 7% return on investment!
But the motivation to short term trading is often not that simple; beyond profitability
there might exist other motivations as well, here is my take on these other motivations...
The challenge
Yet another reason that strikes me is the very challenge of the game. Many short term
traders derive considerable personal satisfaction from a venture that not only offers the
potential of making good money but tests ones mind and intellect, i.e. something which is
challenging in itself.
The fame
The lure of fame cannot be ignored. An outstandingly successful trader has a more than
reasonable chance of being in the limelight: he/she might gain recognition as an authority
on the subject, choose to write books, become a widely-read columnist or be called upon
by television channels to serve as a trading expert. So, its not only about making money.
Dopamine release
Many neurologists and psychiatrists, while explaining the workings of the human brain,
talk about a reward system in the brain which releases dopamine when we do something
pleasurable, challenging or exciting. Such acts where dopamine gets elevated include
gambling, video gaming, having sex, watching pornography, alcohol consumption,
amongst others. I wouldnt hesitate to include short term trading in this category!
Short term trading is like pornography. You cant define it but when you see it, you know it.
The above statement is inspired from a quote by Reserve Bank of India (RBI) governor D.
Subbarao, by his statement to define financial stability,
Financial stability is like pornography. You cant define it but when you see it, you know it.
Theres a popular belief that 80-90% of short term traders lose money. That may perhaps
be true. But many lose big because they lack the required discipline; the discipline needed
to exit immediately when the price begins to move against them.
This book does not seek to elaborate on the psychological aspects of trading. Nor does it
attempt to be a treatise on the kind of discipline required to make a successful day time
trader -- and how to go about acquiring it. Still, it bears emphasis that a successful trader
is one who not only has the staying power but is also endowed with a sense of calm and
balance;: not to act like a chicken with its head cut off, when the going gets tough - which
is bound to happen again and again and happen at unpredictable times. Short term
trading has its rewards, no doubt, but the rewards come with risks attached. Short term
trading can be mastered with the following:
Abandon the adrenaline rush, forget the excitement. Profit depends upon detached
and disciplined execution.
Learn the numbers: The nature of price movement must get inbuilt deeply enough
in you to allow spontaneous decision-making during the trading day.
Cross-verify: Objective measurements must filter unconscious bias.
How to effectively trade the markets next move?
Are price moves random? Is there any basis for trends? What makes prices move? The aha!
process lies at the heart of price change. For instance, consider the series: OTTFFSSE. What
is the next letter? This puzzle creates tension. Until you see the first letters of the ordinal
numbers, one, two. Aha!, you say. A lot happens during an aha. The puzzle dies and the
tension dissipates. A societal aha! drives price. Read the newspapers and the news
magazines during a major move. At first, no one gets why the move is happening. Theres a
lot of confusion. Part of the move is way up, some people get it. At the end, everybody gets it.
The tension is resolved and the move ends.
- Ed Seykota in Technical Analysis Magazine
In short, the art of speculation / short term trading is about figuring out the most probable
direction the future will take. The future is seldom predictable to a precise degree, but we
can make trading predictions that have higher odds. The way to make money in short
term trading is to be able to anticipate the market direction by using some trading
techniques, enter the trade, and use appropriate exit strategies liquidation procedures
either with profit, or with a loss.
Contrary to popular belief, you do not need to know what the price will be in the
future to make money. Your goal should rather be to improve the odds of making
profitable trades. The use of quantitative analysis will give you an edge; an edge that you
would not have gained without it, even if your analysis is as simple as determining the
long, intermediate and short-term bias, whether the price rises , declines or stays in
sideways of the security you are trading.
Short Term Trading Rules
Based on a study of numerous trading books, my trading experience and the trading advice
that I have received from friends and experts who are into the hedge funds business, Ive
tried to summarize the rules that you need to adhere to when embarking on a trading
career.
Rule # 1: Trading is a Business
No one would start a business without first ensuring everything - or almost everything -
thats needed to keep it going is firmly in place. Yet, when it comes to trading people try to
cut corners, be it with regard to the initial capital investment or the infrastructure.
I wish I could make it easy, what is the capital required for entering into short term
trading, and just give you a formula like.
[ (Age of paternal grandmother at time of death) x (your current shoe size)] / the square
root of the CPI = Amount need to trade full-time
Plagiarised from the blog post http://bclund.com/2013/06/02/so-you-want-to-trade-for-a-

living-how-much-money-do-you-really-need/
Let me be blunt: if your working capital is less than 200,000 USD (and be prepared to lose
that 200,000 USD in the short term trading adventure !!) , youd probably be better off
putting that money in a mutual fund or a passive ETF than attempting to be a trader; that
way
Thats lot of money to some, but that will give you the most piece of mind and ideally a
longer runway in which to achieve consistent profitability.
On the other hand, if you are serious about getting into trading on your own, make sure
you have the basic infrastructure in place, in addition to the start-up capital. This would
include a high-end computer dedicated for trading, high speed Internet connections
(couple of them; if one goes down, you could use the other), subscription to the best
trading platform, plus price charts, data, etc, that you would need.
Rule # 2: Have a Trading Plan
If you fail to plan, you plan to fail
A trading plan is absolutely essential. It is vital to your trading success. A trading plan is
your road map to success in the market, without it you will get lost. Developing a trading
plan is essential for long term trading success. Consider the following simple steps in
creating a trading plan.
Step 1: The first step in making your trading plan is to create a trading strategy. The
biggest mistake that new traders make is to trade on gut feeling, or someone elses trading
tip. Even if you make some money in this manner, it is a trading sin because you cant
possibly repeat the profits again unless your friend gives you another tip. You need to
develop a trading strategy that you yourself understand inside out.
Step 2: Step two is to consider risk management because knowing when to enter a trade is
just as important as knowing when to exit it. Trading is just like surgery where you want
your doctor to get both the first incision and the final stitch right - only in this case, you
are the doctor.
Step 3: Once you have created your trading strategy, it is time to test, re-test, and test.
Everything needs to be tested backwards and forwards. You test drive a car before buying
it; there is no reason why you shouldnt test your trading strategy before applying it.
Step 4: Know your trading strategy like your best friend.
Rule # 3: Be patient
Patience is an essential trait in trading. A majority of people who are new to trading,
however, tend to err towards overtrading. Carried away by an adrenaline rush, they tend to
become reckless. They trade more often than they should, and trade a larger number of
contracts than they ought to. Sure, you experience more thrills when you trade often. It
gives you a quick high. But this approach can ruin a traders financial well-being, particular
one who has just ventured into the business.
In the prevailing I want it right now, right here trading environment, traders have little
patience. However if you study the lives of successful traders, you will find that they have
many things in common. The one important similarity among successful traders is
patience. This formula has not changed since early 1800s, when US futures trading began.
In fact, it can even be traced as far back as 1640, when trading took place in tulip bulb
futures.
Rule # 4: Remain consistent
Successful traders find a formula and stick to it. I would suggest a trader, particularly a
novice trader, should adhere to one or two carefully selected trading patterns that work
best for him / her. The need for a plan, a strategy and applying it in a consistent,
methodical manner cannot be overemphasized.
When it comes to trading, rules are not made to be broken unless you want to end up
broke. More importantly, rules exist to protect us from ourselves. Take the example of a
few simple traffic rules, namely driving on the right side of the road, not over speeding,
and not driving after consuming alcoholic drinks. Now consider breaking the three rules
by speeding on the left side of the road after couple of alcoholic drinks;
What do you think will happen?
Do you think that the only risk is that you will get a traffic ticket from the cop? Actually,
you are likely to be added to the list of road accident victims.
Why? Simply because most of them failed to obey simple traffic rules: The same goes for a
trader; should you choose to speculate in an inconsistent fashion, trust me, the financial
results might well be similar to your trading account.
Rule # 5: Let winners run, not the losers
Press your winners and not the losers.
This is the most important rule in trading simply not because Larry Williams has written
so, in many of his trading books losers do the opposite: they increase the size of their bets
when losing, and trim their bets when winning! Winners look for positive streaks and
press home their advantage.
Rule # 6: Never average down and never lie about your losses
The short point is only people with room-temperature IQ double losses. Professionals
average up, never down. They got to be professionals in the first place because they added
to their winners, not their losers. For one, you shouldnt even be in a situation where you
start thinking about averaging down. You should have exited the trade before it got to the
point where averaging down became tempting
In fact, this rule is as old as trading itself. Dickson G. Watts, who was President of the New
York Cotton Exchange between 1878 and 1880, wrote about it as early as the 1880s, in the
book Speculation As A Fine Art and Thoughts on Life:
It is better to average up than to average down. This opinion is contrary to the one
commonly held and acted upon; it being the practice to buy, and on a decline to buy
more. This reduces the average. Probably four times out of five this method will
result in striking a reaction in the market that will prevent loss, but the fifth time,
meeting with a permanently declining market, the operator loses his head and closes
out, making a heavy loss -- a loss so great as to bring complete demoralization, often
ruin.
Then, too, you will often hear traders boasting about their wining trades. In contrast,
seldom will you hear traders admit about their losing trades. My unasked advice would be:
never delude yourself by boasting about your winning trades; instead, be honest to
yourself about your losing trades. Please make it a habit not to lie about your trading
losses, at least to yourself and your spouse. By facing the truth when you do make losses,
at least you wont be tempted to average down again.
Never admit to having made a profit, but always emphasize your losses.
- From the blog post 10 Things I Learned From, from Victor Niederhoffer
Why should one never average down? Mathematically, it would take too long to
explain. Its sufficient to know that thats how real life trading works. Almost all huge
bankruptcies in trading companies worldwide happened because the trades involved
doubled up losing positions with excessive leverage or lied about the losses to themselves
and to their bosses. Hoping to recover losses by averaging down through additional
leverage hardly ever works unless someone is really very lucky.
Rule # 7: Follow the pattern, not the price
Put your trust in your trading patterns, and do not be afraid when price reach historic
highs or lows. Markets are where they are for a reason. Evaluate that reason on its own
merits. Ignore the price, follow the signal. Thinking on the lines that The Dow Jones
Industrial Average ( DJIA) is now at an all-time / five-year high and trading at 16,000
levels and my pattern is telling me to go long but I dont think it will go beyond 16,001,
etc. is not very wise. Just go by the pattern. Likewise, if say S&P 500 Index is trading at,
say, 500 dont be afraid to go short if the pattern tells you to do so.
Rule # 8: Use stop loss
As soon as a trade is initiated, you should have a protective stop loss.
However, there is 99% chance that a very tight stop loss of 1 or 2 points will invariably get
triggered and you would be stopped out of a perfectly good trade.
If, on the other hand, you use a very wide stop loss value of say 110.05 points (which is one
tick more than the largest one day swing of S&P 500 Index on Apr 4, 2000, the intraday
range was 110.04 points) it may never get triggered. The point is, you need to give your
stop loss some breathing space to work, but not those extreme levels of 110 points on every
trade you initiate.
Well, that is the theory. Coming now to the practicality of stop loss
The market loves stop losses. In real-life trading you will soon discover that the market has
a way of "knowing where your stop loss is. The market will periodically test your stop
losses so as to take as much money as possible from you.
From the financial literature that Ive read, and from a post-mortem of the trade log that I
maintain, I have personally come to the following conclusion: The traditional stop loss
neither reduces nor increases a traders losses relative to the buy-and-hold strategy. This
is, of course, in sharp contrast to the common belief that using stop loss strategies can
improve investment returns.
While I may not be able the offer the nitty-gritty of stop-loss workings in detail in this
book, here are my reasons why the stop loss strategy doesnt work in real life trading, as
envisaged in the back testing results:
Stop losses are not guaranteed to work because of full gap openings against ones
positions. For example you are long with an overnight position with ES futures trading at
1,500 levels, and your stop loss, let us say is at 1,480. Now suppose ES futures opens at 1,475
the next day, where do you think your stop loss level of 1,480 would have got executed?
During the intraday movements, it may look reasonably well that stop loss might get
executed at our desired level but again because the data set only has OHLC figures for our
back testing purposes, it is impossible to tell if our entry or our stop loss is the one that
occurred during the adverse movement happened during intraday (for example, consider
OHLC levels of 1500, 1520, 1480, 1510, and assume we had gone long at Open+1%, i.e. at
1,515 level, by placing a stop loss level at open-1%, i.e. at 1,485. Now either of the following
two would have happened on that day:
a) 1,520 is hit after 1,480 in the intraday movements, in which case the outcome is a 5-point
loss if exited at close.
b) If 1,480 is hit, after 1520, in which case the outcome is a 30-point loss as our stop loss
level of 1,485 is hit sometime during the course of the day.
It gets even more complex to design a stop loss if one considers the trade volumes at
extreme points during the intraday high or intraday low. For example, consider your stop
is at 1,480 in the above OHLC case, and you are holding 1000 trade lots (or future
contracts), whereas only hundred or fewer lots get executed at 1,480, how, then, would you
treat the remaining lots?
So, what, then, is the solution?
As a rule of thumb limit your losses with the use of stop losses as per your risk appetite
(and no back testing results are sure about your risk appetite, for example a 0.1 % loss of
the trading capital might hurt someone, whereas even a 2% loss of the trading capital may
not particularly bother someone else). It hurts to take a stop loss, but it is much less
painful than the ruin of the trading capital.
Hence the old adage,
"Bulls make money, bears make money, but pigs get slaughtered"
On the other hand, since all our back testing is done assuming we close out the positions
as per fixed time, that is either next day at close, or at todays close, why do we need to
bother about the stop losses. A proper alternative to the use of a stop loss strategy in such
a situation is to trade with a low enough percentage of the trading capital, so that disaster
won't knock us down
As a rule of thumb, whether you follow stop losses or not, I would suggest a cap of 2% of
your trading capital to risk on a single trade as your protective stop, which gives you room
for 50 trades.
Rule # 9: Dont be obsessed by minute-by-minute market movements
One great mistake the man makes who watches the ticker all the time is that he trades too
often
- William D. Gann
Watching the ticker can be fun. It can even be mesmerizing. Many people, though, enter a
trade and then anxiously watch the tape with their eyes glued to the screen, almost as if
their whole life depended on this one trade. Or, they go channel surfing, moving from one
business TV channel to the next, their mind obsessed with the outcome of that one
particular trade.
This kind of behaviour does no one any good. Rather, what it does is raise your blood
pressure and add to your stress levels. Do your blood pressures a favour, enter the trade if
all of your trading rules are met, put a stop loss, and go take a nap, or go to a movie, or
play with your kid, or help your partner with the cooking . . . .
Rule # 10: Avoid over-reliance on market gurus
Im spitting in my own rice bowl here, but you should not be letting some self-appointed
market guru dictate or dominate your trading decisions. The most you should expect, or
accept, from folks like me are a few trading patterns, and a bit of advice on how to make a
trading plan. No one knows or cares as much about your personal circumstances as you
yourself do: how much money you can invest, your tolerance for pain, your goals, your
most suitable and comfortable time frame, etc. And note, your guru will not bother to part
with a single penny if all his great picks you fall for come a cropper.
Rule # 11: Maintain a trading log
A trading diary or log is a great way to check and confirm your trading entries and exits.
Consider what this can do for you as a trader. If it is followed properly, it can, and most
likely will, help improve your level of self-discipline and ultimately lead to an increase in
your self-confidence. How? If you execute when the signals call for action, you can validate
whether you responded when called upon to do so. You can check your work. You will find
out whether you hesitated when your methods called for you to exit and if you timed it as
per the system or not.
Ask yourself the following questions in addition to working out your profit and loss
account:
Did I follow my trading plan today?

Did I maintain discipline today?
Did I do the research required today?
The trading log will reinforce the validity of your trading strategy. By cataloguing your
trades, you will gain more experience in identifying the patterns that drive your trading
signals. It also keeps track of what went right or what went wrong with a trading plan. It
will allow you to study and examine the results in black and white. On successful trading
days, it will be good to capitalize on your successes so that it can be repeated. Of course,
on bad days, provided you are not tempted to average down or tempted to hide from your
spouse about your bad day, it can help you focus on what went wrong so that you can
understand and improve on it and stop repeating the same mistakes over and over again.
Rule # 12:Dont think this market stuff is easy
Its not that hard to make money either in a roaring bull market or a raging bear market.
Dont take yourself to be a genius when everything is going great for you. Equally, dont
think of yourself to be dumb when nothing is going right. The market whips us all now
and then. The whipping usually comes just when we think weve got it all figured out.
Here I would like present an analogy with the possible moves in chess.
Just after the first move, there are 400 moves open for both players. Each player can move
any of his 8 pawns 1 or 2 squares and the knights each have two squares they can go on to
and, hence 20x20 possibilities. After two moves apiece, there are 72,084 possible moves
available, after three moves apiece, there are 9+ million moves possible, and after the four
moves apiece, there are 318,979,564,000, or about 319 billion possibilities.
If the calculations that I made are right, there are 169,518,829,100,544,000,000,000,000,000

ways to play the first ten moves of a game of chess. That is about 169 octillion possibilities!
Well those are the numbers of possibilities in a game of chess which is played between
only 2 players. In contrast, the trading game has hundreds of thousands of players and
therefore practically infinite number of possible moves available!
So, you must learn to put your ego aside when dealing with the market. Remember, the
market, and only the market, is always right, and its we who could be wrong.
Don't be a hero. Don't have an ego. Always question yourself and your ability. Dont ever
feel that you are very good. The second you do, you are dead
Paul Tudor Jones.
And the Rule # 14: Live by the rules
If you follow the rules you have made, then you have a better chance of succeeding. This
applies to any aspect of life. As Leonardo da Vinci stated, Simplicity breeds elegance.
I dont think you as an advanced trader bought this book to read this first chapter,
lets move on talking about what is supposed to be the building block of Quant
trading backtesting
Introduction to backtesting metrics
Why Backtest a trading strategy?
Quick answers to the question:
to determine whether a theory or hypothetical construct is valid in historical

testing
to summarize the overall hypothetical performance of a system and to analyze its
various aspects in order to isolate its strong and weak points.
the purpose of testing a pattern or a trading system is simply to find out what will
work best on the basis of what had worked best in the past. You test drive a car
before buying it; there is no reason why you shouldnt test your trading strategy
before applying it.
What is Backtesting?
Definition of backtesting from investopedia
Backtesting is a key component of effective trading-system development. It is

accomplished by reconstructing, with historical data, trades that would have occurred in
the past using rules defined by a given strategy. The result offers statistics that can be used
to gauge the effectiveness of the strategy. Using this data, traders can optimize and
improve their strategies, find any technical or theoretical flaws, and gain confidence in
their strategy before applying it to the real markets. The underlying theory is that any
strategy that worked well in the past is likely to work well in the future, and conversely,
any strategy that performed poorly in the past is likely to perform poorly in the future.
This article takes a look at what applications are used to backtest, what kind of data is
obtained, and how to put it to use!
Important metrics to consider in the Backtesting

There are many factors traders pay attention to when they are backtesting trading
strategies. A thorough back test of a trading system should include the following
information. Here is a list of the most important things to remember while backtesting:
Number of years analysed: Although it is desirable to test as much data as possible, the
minimum should be at-least last 4 years of recent historical data. Often people test the
previous bull markets data if they figure that the current market resembles a bull market,
and vice versa. The most important data tranche is the most recent one as that is what the
current market phase is, as you want your trades to work there.
Number of trades analysed: More important than the number of years analysed is the
number of trades analysed. A typical pattern should generate at least 20 to 25 trades over
the test period in order to support the statistical significance of back-testing results. It
would be wrong to assume that a pattern that had formed only a couple of times in the
past is a guide or reference to a good trading opportunity in the future.
You may perhaps have come across the term called accuracy while reading statistics.
Accuracy usually increases as the number of samples becomes larger and the measurement
of deviation or error becomes proportionately smaller. Accuracy is calculated as follows:
Accuracy = (1- (1/ Square root of the sample size))*100.
This concept can be extended to the number of trades analysed. For example, with a
sample of four trades, the error is 50%. If a system has had only 4 trades, whether
profitable or loss-making, it is very difficult to draw any conclusions about performance
expectations. To reduce the error to 10%, the sample size has to be 100 trades. But this
could be tricky in respect of a system that might generate only 3 or 4 trades in a year. To
compensate for this, the identical pattern can be applied to other markets and the sample
size thus increased. By keeping the sample error to no more than 20%, the risk of small
sample size can be minimized.
Percentage winning trades: This is not as important as one might think. In reality, few
patterns have more than 70 percent winning trades. Patterns that are correct as little as 35
percent of the time can still be good systems, whereas systems that are accurate as much
as 90 percent of the time may be bad systems.
Gross Profit: is the sum of points generated by all profitable trades
Gross Loss: is the sum of points generated by all loss making trades
Total Net profit: is gross profit minus gross loss
Total Net profit %: is the sum of all trades profit or loss in percentage terms add together
Average profit per trade: This measure tells you what the average profit per trade for all
the trades has been, minus commission and slippage. The average profit per trade figure is
important as it considers all profits and all losses. Some people might question - and
legitimately, too - whether, say, a 1-point average profit would vary to a great degree from
the underlying $SPY value. For example, a 1-point gain translates to less than 1 percentage
gain when the $SPY is trading above 150 levels, as opposed to when the $SPY is trading
below 100 levels. So, its important to view the trade details in percentage terms as well.
Median profit per trade: in probability theory and statistics, median is described as the
numerical value separating the higher half of a sample, a population, or a probability
distribution, from the lower half. The median of a finite list of numbers can be found by
arranging all the observations from lowest value to highest value and picking the middle
one. If there is an even number of observations, then there is no single middle value; the
median is then usually defined to be the mean of the two middle values.
The median can be used as a measure of location when a distribution is skewed, so, its
important to view the median profit per trade (and profit percentage per trade as well) to
be in trading strategies favour. For example if the average profit per trade is, lets say 0.5%
and median profit per trade is -0.2%, consider avoiding the system.
Largest single losing trade: This measure indicates how much of the drawdown is the
result of a single losing trade. In real-life trading, this helps you adjust the initial stop loss.
For example, if the average losing trade was $ 200 and the largest single losing trade was $
1,600, as you would readily guess, a good portion of the average losing trade is borne by
the largest losing trade. If you had a better way of managing the largest loser, your overall
system performance would be considerably better. You should investigate further the
cause for the larger losing trades. In real life trading be prepared to encounter an even
higher largest loss, than thrown up by back tested results and brace yourself to handle
such situation.
Largest single winning trade: This is more important than the largest single losing
trade. Why? Suppose, for example, your total hypothetical profit was $100,000, and say $
80,000 of this is attributed to only one trade (e.g. short with 5X leverage, as you believed in
Sell in October strategy at end of Sep 2008 and covered at end of Oct 2008), then what you
have is a distorted average trade figure. Its often a good idea to remove such an
exceptional single trade from the overall results and re-compute the system performance
in order to confirm whether the trading system is actually good enough to trade. In real
life trading, be as realistic as possible and be prepared that you may never encounter that
largest winning trade derived from the back tested results.
Profit factor: Profit factor is the systems gross profit divided by gross loss. Look for
systems that have a profit factor of 2.5, or higher.
Outlier adjusted profit factor: With any trading pattern, you are going to have one or
two exceptional wins. The chances of these trades recurring in the future are very slim and
shouldnt be considered in the overall performance summary. It is often a good idea to
remove the largest single winning trade while calculating the outlier adjusted profit factor.
And is the way outlier adjusted profit factor is calculated in this book when presenting
backtest performance summary.
You might want to consider removing even the top 5% winners. For example, if the
number of trades is 40, then remove top 2 largest winners, if number of trades is 60, and
then remove top 3 largest winners. Look for trading systems with an outlier adjusted profit
factor of more than 2.
Maximum number of consecutive losers / winners: The maximum number of

consecutive winning and losing generated is, more often than not, purely psychological.
Even using an excellent trading pattern is no guarantee that you will only have winning
trades in succession all the time. In other words, there are bound to be a string of
consecutive losing trades. But not many traders have the ability to maintain their
discipline through four or more successive winning/losing trading trades. Even at the third
consecutive loss, you would find many traders ready to abandon their system, thinking
that either the system is going through rough patch. To be a winner one would need to
weather such storms and be able to take ten or more consecutive losses in ones stride.
There is another problem that few of the traders encounter, thinking that their system is
going through a fluky winning streak after hitting 4 or more consecutive winners.
Remember, Camarero a thoroughbred racehorse raised and raced in Puerto Rico holds the
world record of the most consecutive wins for a thoroughbred racehorse at 56 in a series of
races between April 1953 and August 1955. The point we are trying to make here is, the
human mind cannot relate easily to an unbroken string of successes. All of us expect a
failure to happen after a successful run. And once a good run has been broken, we again
wait for success. In trading, though, if you are on a clear winning streak, press on. Dont
allow the fear of loss to stop you in your winning streaks, in short as they say in trading
manuals, Let winners run, not the losers
Maximum drawdown: This is one of the most important aspects of a trading system. A
very large drawdown is a negative factor. Maximum drawdown is the largest peak-to-valley
loss of a trading systems historical profit curve. Maximum drawdown can be presented in
absolute Dollar terms.
Maximum drawdown (%): As discussed earlier, maximum drawdown is the largest peak-
to-valley loss - in absolute Dollar terms - of the trading systems historical profit. Now,
suppose you would like to determine the efficiency of a trading strategy in terms of the
overall returns it provided on your starting capital. In that case, we can calculate the
maximum drawdown as a percentage of the starting capital.
Here is pictorial depiction of Maximum drawdown
Payoff ratio (Ratio avg win/avg loss): Payoff ratio is the systems average profit in Dollar
terms per winning trade, divided by the average loss in Dollar terms per losing trade.
Unless the system has a particularly high win/loss ratio, we look for high payoff ratios or
average profit per winning trade divided by average loss per losing trade
Payoff ratio % (Ratio avg win/avg loss %): Average profit % per winning trade divided
by average loss % per losing trade.
Luck Factor: This measure shows how the largest trade compared with the average trade
and is calculated by dividing the percentage profit of the largest winning trade by the
average percentage profit of all winning trades. The larger the value of the luck factor, the
greater portion of the systems results can be attributed to the largest winning trade, or,
luck.
Recovery factor: Total Net Profit divided by absolute value of maximum drawdown. Its
desirable for a system to have a recovery factor greater than buy and hold.
Percent wining months or years: Depending on the time horizon, a trading pattern that
averages only one winning month out of twelve, or two winning years out of ten years, is
unattractive. You need to look for patterns with at least five profitable months in a year
and five profitable years in a ten-year period.
Sharpe Ratio: This is probably the most common measure used by large fund houses in
comparing potential investments. The Sharpe Ratio was formulated by Nobel Laureate
William F. Sharpe in 1966 as a measure for comparing the performance of mutual funds.
This measure was introduced as a reward-to-variability ratio but subsequently came to be
referred to simply as the Sharpe Ratio after its originator. Sharpe Ratio was one of the first
statistical measures that factored both return and risk into a single formula, thereby giving
us a single statistical measure of risk-adjusted return.
Sharpe Ratio = (APR RFR)/ (StdDevAPR)
Where:
APR = Annualized portfolio return

RFR = Annualized risk-free rate (90 day T-bills are typically used as a proxy)
Standard Deviation of APR (StdDevAPR) = Annualized standard deviation of the
portfolios returns.
For short term trading as our holding period is only one or few days, the RFR can
be set to zero.
ps: we have set the RFR value to Zero in the backtest performance summary reports that we
are presenting in this book.
Sharpe Ratio indicates the smoothness of the equity curve. The higher the ratio, the
smoother the equity growth or decline. A Sharpe Ratio value of above 0.5 is considered
good, while a value above 1.0 is excellent and a value above 2.0 is considered outstanding.
When choosing a patterns reliability in real-life trading, Sharpe Ratio is used on the
assumption of a zero risk-free rate of return and at least a Sharpe Ratio of 0.5 from the
back testing results.
Pessimistic rate of return: Pessimistic return on margin (PROM) is an annualized yield

on margin that is adjusted in a way that pessimistically assumes that a trading strategy will
win less and lose more in real-time trading than it did in its historical simulation.
PROM adjusts the gross profit by calculating a new, mathematically adjusted, pessimistic
lower gross profit. The first step is to calculate the number of winning trades reduced by
its square root or, in other words, adjusted by its standard error. This adjusted number of
winning trades is then multiplied by the average winning trade to arrive at a new, adjusted
lower gross profit.
PROM next adjusts the gross loss by calculating a new; mathematically adjusted,
pessimistic higher gross loss. The first step is to calculate the number of losing trades
increased by its square root or, in other words, adjusted by its standard error. This
adjusted number of losing trades is then multiplied by the average losing trade to arrive at
a new, adjusted larger gross loss.
A new adjusted gross profit, or loss, is then calculated using these adjusted pessimistic
gross profit and gross loss values. This is then used to produce an annualized rate of return
on margin.
The formula is
PROM = {[AW x (#WT - Sqrt(#WT))] - [AL x (#LT - Sqrt(#LT))]} / Margin

#WT = Number of Wins
AW = Average Win
#LT = Number of Losses
AL = Average Loss
A#WT = Adjusted Number of Wins
A#LT = Adjusted Number of Losses
AAGP = Adjusted Annualized Gross Profit
AAGL = Adjusted Annualized Gross Loss
A#WT = #WT Sqrt (#WT)
A#LT = #LT +Sqrt (#LT)
AAGP = A#WT x AW
AAGL = A#LT x AL
Sqrt = Square root
An example here would help. Assume a $50,000 annualized gross profit, 50 wins; $20,000
annualized gross loss, 50 losses; and a starting capital of $100,000.
As a basis for comparison, let us first calculate an annualized rate of return on the starting
capital. This would be a 30 percent annualized return on margin (50,000 20,000) /1,
00,000 = 0.3 x 100 = 30%).
In contrast, let us look at the PROM of this strategy:
Adjusted Number of Wins = 50 Sqrt (50) = 43

Adjusted Number of Losses = 50 + Sqrt (50) = 57
Adjusted Annual Gross Profit = (50,000/50) x 43 = 42,929
Adjusted Annual Gross Loss = (20,000/50 x 57 = 22,828
PROM = (42,929 - 22,828) / 1, 00,000 = $20,101
PROM = 20.1 percent per year.
As you would note, the nearest digits have been rounded off in the above calculations.
This example clearly demonstrates why this measure is termed pessimistic. It assumes that
a trading system will never win as frequently in real life as it had in testing and also that
the system will lose more frequently in real life than it did in its testing. PROM is a robust
measure because it factors in a number of significant performance statistics, such as gross
profit, average win, gross loss, average loss, number of wins, and number of losses. Also,
PROM by nature of the square-root calculation penalizes small trade samples; that is, the
square root of 4 is 2 which 50%, whereas the square root of 100 is 10, which is 10%.
PROM is an excellent measure to compare the performance of different trading models; it

is suggested that a trading models PROM be at least 50% of the historical returns.
Return on Account: we have used the starting capital of $16700 and taken the total net
profit as the basis for calculating the return on account.
For ex: if a trading strategys net profit is 20 $SPY points, then the return on account is
11.9%
The rationale for $16700 - the highest adjusted closing value of $SPY during Jan 2000 till
June 2013 is 166.29 (on May 21, 2013) and Ive considered the nearest digit which is 167. So
with $16700 a trader can buy/sell 100 units of $SPY, without leverage on almost all the
trading days during our test period.
Ps: You might argue that 16700 value has look ahead bias, for which my counter argument
would be I prefer to use the known max/extreme values during the test period even though
they are appearing at the end cycle in the test period.
Compounded Annual Return %: The compound annual growth rate is calculated by

taking the nth root of the total percentage growth rate, where n is the number of years in
the period being considered. This can be written as follows:
ps: when calculating the CAGR in the backtesting performance summary reports that we
are presenting in this book, the following methodology is used
Beginning value: $16700

Ending value: $16700 plus the total net profit in points generated by the trading
strategy
#of years: is the difference between the first date when the trading strategy
triggered its first trade minus the last date when the trading strategy triggered its
last trade approximated in years to the 1st decimal
Calmar Ratio: A ratio used to determine return relative to drawdown (downside) risk in a
trading strategy, and is calculated as: CAGR/Maximum Drawdown %. The higher the
Calmar ratio the better. This ratio helps determine return on a downside risk-adjusted
basis.
T-Test: The t-Test is a simple statistical test that tells you how likely these test results are
to have occurred by chance alone. A t-Test of less than 1.6 favours chance, above 1.6 and
one is more likely to have found something real - a tradable Key Idea. The higher the score
given (over at least 20 sample size) the more likely one has found a tradable history.
The t-test is calculated as
t -test= square root (n) * (average trade %/ standard deviation of trades %)
A more stringent t-test value to look for is 2.1 for degrees of freedom 25 (or sample size).
As the two tailed P value at t-test of 2.1 for a sample size of 25 equals 0.046 which by
conventional criteria, is considered to be statistically significant.
Most of the trading strategies presented in this book try to meet the following criteria in
the historical backtest performance summary report
Outlier adjusted profit factor is more than 2.0 and

Average profit per trade of around 10 points ( leaving aside 4 points as a spread
trading costs , a 6 point profit per trade as the trading edge)
Sharpe Ratio of around 0.5 and
T-Test is more than 1.6
You can download the excel sheet that Ive used to backtest the trading strategies
presented in this book @ http://paststat.com/blog/spy-quant-back-testing-excel-sheet
Backtest performance summary of buying SPY every day at close and exiting next
day at close
The following backtest performance summary report is given as reference to compare the
metrics of other trading strategies to that of buy-hold approach. Look back period is from
1st Jan 2009 till 28th Jun 2013. (The rationale, being I would like to see more than 1000
continuous sample size from the recent data).
Backtest Performance Summary
Total Net Profit 75.86 Total Net Profit % 72.97%

Gross profit 579.5 Gross Loss -503.64
# Trades 1129 % Profitable Trades 56.00
# Win Trades 632 # Loss Trades 492
Profit factor 1.15 Outlier Adjusted Profit Factor 1.14
Average Profit Per Trade 0.07 Average Profit Per Trade % 0.06%
Median Trade 0.1 Median Trade % 0.08%
Average Win Trade 0.92 Average Loss Trade -1.02
Average Win Trade % 0.83% Average Loss Trade % -0.92%
Ratio avg win/avg loss 0.90 Ratio avg win/avg loss % 0.90
Max Consecutive Wins 14 Max Consecutive Losses 7

Max Win Trade 5.04 Max Loss Trade -7.49
Max Win Trade % 7.17% Max Loss Trade % -6.51%
Max Drawdown ($) -2420 Max Drawdown % -13.78%
Account Size ($) 16700 Return on Account 45.40%

Pessimistic Rate of Return 18.00% CAGR 8.71%
Luck Factor 8.59 Recovery Factor 3.13

Sharpe Ratio 0.64 Calmar Ratio 0.63
T-Test 1.73
Why no stop loss?
The primary reason for this, this book cant act like as if it is running mechanical trading
business for you. We dont feel it is appropriate to suggest Stop Losses without
understanding someones financial situation and risk tolerance, for example a loss of 100
USD might bother you on some day , where as a loss of 100,000 USD might not bother
some other trader some other day.
Some advanced research evidence on Stop Loss
1. From Bruce Vanstone. "Do initial stop-losses stop losses?" Information Technology
papers (2008). Available at: http://works.bepress.com/bruce_vanstone/15
A great many traders use stop-loss rules in their everyday trading. In

addition, during periods of high volatility, many traders attempt to protect
their downside by moving their stops closer to the price action. However,
there appears to be little real justification for doing this. There is a shortage
of evidence that demonstrates that stops are actually providing the benefits
that traders believe they are. This paper is an empirical study of the use of
stops within a defined trading strategy. The methodology used within this
paper can easily be ported to any individual traders strategy. In the specific
case studied in this paper, the results suggest that initial stops degrade
long-term portfolio performance.
2. Table about Stop Losses and initial trading results, excerpted from the book Short
Term Trading Strategies That Work, by Larry Connors and Cesar Alvarez
As you can see the results indicate that no benefit has been obtained from any of the
percent based stop combinations.
Important notes:
I hate to hear the word margin trading, we dislike stop losses, and we dont like to hear
term compounding the returns from individual trades, as Albert Einstein quoted it as
eighth wonder of the world.
Why no compounding?
Assume a rate of return of 1% per day, for the sake of illustration, and if it could be
sustained, $1000 would become 11.83 trillion dollars in 9 years and 3 months time
(assuming 252 trading days in year) , which is sufficient enough to clear the entire US
public debt , that stood at 11.96 trillion as on Apr 2, 2013 !!
Should the trading systems presented in this book work on other instruments?
Not necessarily. Many successful trading systems are designed for a single market, a single
ticker - whether that market is S&P 500, Russell 200, treasury bonds, or pork bellies. If the
trading system passes, a tradable edge in one market, there is no reason to insist that the
same trading model trade multiple markets. If a model trades SPY well, there is no reason
to insist that it work on gold, oil, or corn. Similarly you can't expect a model working on
healthcare stocks to work on technology, or banking stock.
Data sources and Data Normalization
Ive relied upon finance.yahoo.com for $SPY historical price as the historical data sources.
Normalizing Data for dividends
Understanding the adjusted close: Adjusted Close provides the closing price for the
requested day, week, or month, adjusted for all applicable splits and dividend
distributions. Data are adjusted using appropriate split and dividend multipliers, adhering
to Center for Research in Security Prices (CRSP) standards.
The process of normalizing the data is simply to take the ratio between the stocks Adj.
Close to Close and apply it to all fields that is the raw Open, High, Low, Close and
Volume.
Consider the following output from Yahoos historical database
Date Open High Low Close Volume Adj Close

Jun 24, 2013 157.41 158.43 155.73 157.06 22,23,29,000 157.06
Jun 21, 2013 159.64 159.76 157.47 159.07 27,19,56,800 159.07
Jun 21, 2013 0.839 Dividend
Jun 20, 2013 161.86 163.47 158.98 159.4 32,12,55,900 158.56
Jun 19, 2013 165.6 165.89 163.38 163.45 20,61,49,500 162.59
Jun 18, 2013 164.53 165.99 164.52 165.74 11,46,95,600 164.87
For each entry of each row (besides volume) we multiply by the ratio of that rows
Adjusted Close to Close. For the volume field we multiply by Close to Adjusted Close ratio.
Ps: It doesnt matter even if you dont normalize the volume field, even if our trading strategy
includes volume.
We get the effective historical prices, including the normalized volume
Date Open High Low Close Volume

Jun 24, 2013 157.41 158.43 155.73 157.06 22,23,29,000
Jun 21, 2013 159.64 159.76 157.47 159.07 27,19,56,800
Jun 20, 2013 161.01 162.61 158.14 158.56 32,29,57,811
Jun 19, 2013 164.73 165.02 162.52 162.59 20,72,39,903
Jun 18, 2013 163.67 165.12 163.66 164.87 11,53,00,835
Ps: if you are replicating the trading strategies presented in this book after Sep 20, 2013 (i.e.
the next ex-div date for $SPY), the Open, High, Low, Close, and Volume fields will differ.
Data Sample
Throughout this book, the data that chosen for testing trading strategies is, between the
January 2000 and June 2013. I firmly believe that this sample data is an accurate and
comprehensive representation, what with many so many Black Swan events included in
the market movements. Therefore the sample data is a reasonably true mirror of both the
past and what the future may witness.
For some of the trading strategies to get sufficient sample size, I might go back beyond
2000. Unless or otherwise mentioned under the trading strategy, the data sample remains
from Jan 2000 to June 2013.
% Plays
This chapter aims at revealing few SPY short term trading strategies based on various
percent changes combined with other criteria.
4% crash on SPY
This is a simple question that comes to anyones mind, lets start with it
Trading strategy rules

SPY is down by more than 4% during current trading session
Go long at close and exit at close during the next trading day.
Example trade
On 18th Aug 2011 SPY dropped by -4.31% and the trade outcome for the Long entered on
18th Aug 2013 close and exiting on 19th Aug 2013 was a -1.79, points loss or -1.63%




T-Test 1.30
Historical trade details
Date Close Loss P/L P/L %

18-Aug-11 109.68 -4.31 -1.79 -1.63
10-Aug-11 107.55 -4.42 4.83 4.49
08-Aug-11 107.52 -6.51 5 4.65
04-Aug-11 115.18 -4.68 -0.17 -0.15
20-Apr-09 76.43 -4.2 1.5 1.96
05-Mar-09 62.58 -4.09 0.11 0.18
02-Mar-09 64.22 -4.51 -0.48 -0.75
17-Feb-09 72.06 -4.28 -0.17 -0.24
10-Feb-09 75.6 -4.58 0.44 0.58
20-Jan-09 73.29 -5.27 3.16 4.31
01-Dec-08 74.09 -8.86 2.85 3.85
20-Nov-08 68.08 -7.42 3.67 5.39
19-Nov-08 73.54 -6.4 -5.46 -7.42
14-Nov-08 78.16 -4.98 -1.04 -1.33
12-Nov-08 77.43 -4.41 4.83 6.24
06-Nov-08 81.98 -5.54 2.71 3.31
05-Nov-08 86.79 -4.21 -4.81 -5.54
24-Oct-08 78.54 -5.06 -2.79 -3.55
22-Oct-08 81.78 -5.45 0.95 1.16
15-Oct-08 81.22 -9.85 3.39 4.17
09-Oct-08 81.84 -6.98 -1.99 -2.43
07-Oct-08 90.26 -4.48 -2.28 -2.53
06-Oct-08 94.49 -5.09 -4.23 -4.48
29-Sep-08 100.5 -7.83 4.16 4.14
17-Sep-08 104.61 -4.5 3.1 2.96
15-Sep-08 107.73 -4.76 1.81 1.68
17-Sep-01 82.81 -5.23 -0.19 -0.23
12-Mar-01 93.24 -4.28 1.53 1.64
14-Apr-00 106.58 -5.72 3.72 3.49
4% rally on SPY
Symmetrical trading system note
A symmetrical trading system is what a professional trader love to trade. In layman's

terms, this means that simply reversing the rules for buying and selling creates a profitable
result on both longs and shorts. This type of pattern carries great value to the professional
trader. The value derives from the fact that symmetry can indicate a cause and effect
relationship between a statistical phenomenon and its outcome.
Mind you, it is difficult to find symmetrical trading strategies, should you find one,
consider yourself lucky and trade them with utmost confidence.

SPY gains more than 4% during current trading session
Go short at close and buy to cover at close during the next trading day.
Example trade
On 30th Nov 2011 SPY gained by 4.11% and the trade outcome for going short and buying to
cover the next trading day at close was a 0.02, points gain or 0.02%

Median Trade -0.59 Median Trade % -0.78%



T-Test -1.70
Date Close Gain P/L P/L %

30-Nov-11 120.33 4.11 0.02 0.02
11-Aug-11 112.38 4.49 -0.75 -0.67
09-Aug-11 112.52 4.65 4.97 4.42
10-May-10 108.55 4.41 0.31 0.29
23-Mar-09 75.32 7.17 1.48 1.96
10-Mar-09 65.65 5.97 -0.42 -0.64
21-Jan-09 76.45 4.31 1.18 1.54
16-Dec-08 82.9 4.7 0.8 0.97
24-Nov-08 76.72 6.93 -0.57 -0.74
21-Nov-08 71.75 5.39 -4.97 -6.93
13-Nov-08 82.26 6.24 4.1 4.98
28-Oct-08 84.6 11.68 0.62 0.73
20-Oct-08 89.16 6.02 2.67 2.99
16-Oct-08 84.61 4.17 0.51 0.6
13-Oct-08 91.45 14.53 1.36 1.49
30-Sep-08 104.66 4.14 -0.06 -0.06
18-Mar-08 118.69 4.15 2.94 2.48
15-Oct-02 71.71 4.81 1.74 2.43
11-Oct-02 68.04 4.39 -0.38 -0.56
01-Oct-02 69.3 4.81 2.08 3
29-Jul-02 72.25 4.88 -0.94 -1.3
24-Jul-02 68.18 5.95 0.57 0.84
03-Jan-01 106.6 4.81 1.15 1.08
25-Apr-00 116.11 4.15 1.32 1.14
16-Mar-00 114.39 4.67 -0.76 -0.66
07-Jan-00 113.93 5.8 -0.39 -0.34
Monday 2% dips on SPY
SPY falls by more than 2% during current trading session

Today is Monday
Example trade
On 15th Apr 2013, which was a Monday, SPY dropped by -2.32%, and the trade outcome of
going long at close and exiting at the close at next trading day was 2.28 points gain or
1.48%
Backtest performance summary




T-Test 1.79
Date Close Loss P/L P/L %

15-Apr-13 154.3 -2.32 2.28 1.48
31-Oct-11 120.82 -2.41 -3.37 -2.79
03-Oct-11 105.83 -2.85 2.32 2.19
08-Aug-11 107.52 -6.51 5 4.65
17-Aug-09 90.57 -2.47 0.72 0.79
22-Jun-09 82.25 -3.01 0.07 0.09
15-Jun-09 85.11 -2.28 -1.16 -1.36
20-Apr-09 76.43 -4.2 1.5 1.96
30-Mar-09 72.18 -3.45 0.67 0.93
02-Mar-09 64.22 -4.51 -0.48 -0.75
23-Feb-09 67.9 -3.58 2.58 3.8
12-Jan-09 79.09 -2.41 0.15 0.19
01-Dec-08 74.09 -8.86 2.85 3.85
27-Oct-08 75.75 -3.55 8.85 11.68
06-Oct-08 94.49 -5.09 -4.23 -4.48
29-Sep-08 100.5 -7.83 4.16 4.14
22-Sep-08 109.46 -2.26 -2.49 -2.27
15-Sep-08 107.73 -4.76 1.81 1.68
25-Aug-08 113.95 -2.03 0.33 0.29
26-Nov-07 124.54 -2.21 1.43 1.15
19-May-03 75.57 -2.34 -0.15 -0.2
31-Mar-03 69.12 -2.28 1.06 1.53
24-Mar-03 70.71 -3.32 0.68 0.96
10-Mar-03 66.06 -2.41 -0.65 -0.98
09-Dec-02 72.35 -2.76 0.97 1.34
07-Oct-02 63.97 -2.07 1 1.56
05-Aug-02 67.42 -3.48 2.27 3.37
22-Jul-02 66.16 -2.96 -1.81 -2.74
03-Jun-02 83.71 -2.65 0.21 0.25
04-Feb-02 87.85 -2.49 -0.54 -0.61
29-Oct-01 85.64 -2.59 -1.03 -1.2
17-Sep-01 82.81 -5.23 -0.19 -0.23
02-Apr-01 90.42 -2.13 -3.02 -3.34
12-Mar-01 93.24 -4.28 1.53 1.64
24-Jan-00 109.7 -2.84 1.25 1.14
Monday 2% dips on SPY Variant
SPY falls by more than 2% during current trading session

Today is Monday
Go long at close and exit at close after 4 trading days
Example trade
On 15th Apr 2013 , which was a Monday, SPY dropped by -2.32%, and the trade outcome of
going long at close on 15th Apr 2013 and exiting on 19th Apr 2013 at close was 0.36 points
gain or 0.23%




T-Test 1.89
Date Entry Date Exit P/L P/L %

15-Apr-13 154.3 19-Apr-13 154.7 0.36 0.23
31-Oct-11 120.82 04-Nov-11 120.8 -0.02 -0.02
03-Oct-11 105.83 07-Oct-11 111.4 5.57 5.26
08-Aug-11 107.52 12-Aug-11 113.1 5.61 5.22
17-Aug-09 90.57 21-Aug-09 94.87 4.3 4.75
22-Jun-09 82.25 26-Jun-09 84.61 2.36 2.87
15-Jun-09 85.11 19-Jun-09 84.8 -0.31 -0.36
20-Apr-09 76.43 24-Apr-09 79.39 2.96 3.87
30-Mar-09 72.18 03-Apr-09 77.19 5.01 6.94
02-Mar-09 64.22 06-Mar-09 62.69 -1.53 -2.38
23-Feb-09 67.9 27-Feb-09 67.25 -0.65 -0.96
12-Jan-09 79.09 16-Jan-09 77.37 -1.72 -2.17
01-Dec-08 74.09 05-Dec-08 79.34 5.25 7.09
27-Oct-08 75.75 31-Oct-08 87.37 11.62 15.34
06-Oct-08 94.49 10-Oct-08 79.85 -14.6 -15.5
29-Sep-08 100.5 03-Oct-08 99.56 -0.94 -0.94
22-Sep-08 109.46 26-Sep-08 109 -0.42 -0.38
15-Sep-08 107.73 19-Sep-08 112 4.26 3.95
25-Aug-08 113.95 29-Aug-08 115.5 1.59 1.4
26-Nov-07 124.54 30-Nov-07 131.4 6.81 5.47
19-May-03 75.57 23-May-03 76.48 0.91 1.2
31-Mar-03 69.12 04-Apr-03 71.96 2.84 4.11
24-Mar-03 70.71 28-Mar-03 70.73 0.02 0.03
10-Mar-03 66.06 14-Mar-03 68.35 2.29 3.47
09-Dec-02 72.35 13-Dec-02 72.23 -0.12 -0.17
07-Oct-02 63.97 11-Oct-02 68.04 4.07 6.36
05-Aug-02 67.42 09-Aug-02 73.47 6.05 8.97
22-Jul-02 66.16 26-Jul-02 68.89 2.73 4.13
03-Jun-02 83.71 07-Jun-02 82.88 -0.83 -0.99
04-Feb-02 87.85 08-Feb-02 88.04 0.19 0.22
29-Oct-01 85.64 02-Nov-01 87.07 1.43 1.67
17-Sep-01 82.81 21-Sep-01 77.53 -5.28 -6.38
02-Apr-01 90.42 06-Apr-01 89.7 -0.72 -0.8
12-Mar-01 93.24 16-Mar-01 91.06 -2.18 -2.34
24-Jan-00 109.7 28-Jan-00 106.2 -3.48 -3.17
4 down days on SPY and today is Friday
Not exactly percents are involved, but I loved the profit factor and the win percentage with
this trading strategy

SPY is down for four days in row
Today is Friday
Go Long at close and exit at the close next trading day
Example trade
On 28th Dec 2012, which was a Friday, SPY was down for four days in row, and the trade
outcome for the long entered at close on 28th Dec 2012 and exiting on 31st Dec 2012 was a
2.35 points gain or 1.69%




T-Test 2.47
Date Close P/L P/L %

28-Dec-12 138.68 2.35 1.69
18-May-12 126.25 2.17 1.72
25-Nov-11 112.01 3.24 2.89
29-Jul-11 123.87 -0.53 -0.43
13-Aug-10 101.7 -0.05 -0.05
30-Jul-10 103.54 2.34 2.26
02-Jul-10 95.96 0.63 0.66
07-May-10 103.97 4.58 4.41
02-Oct-09 94.87 1.42 1.5
22-May-09 81.55 2.09 2.56
20-Feb-09 70.42 -2.52 -3.58
10-Oct-08 79.85 11.6 14.53
18-Jan-08 117.3 -1.19 -1.01
04-Jan-08 125.52 -0.11 -0.09
03-Nov-06 118.42 1.34 1.13
09-Jun-06 107.76 -1.16 -1.08
06-Aug-04 88.85 0.13 0.15
07-Feb-03 67.77 0.48 0.71
21-Sep-01 77.53 2.73 3.52
09-Feb-01 104.1 1.2 1.15
15-Dec-00 103.42 1.38 1.33
01-Dec-00 104.12 0.89 0.85
10-Nov-00 107.6 -0.85 -0.79
23-Jun-00 113.41 1.46 1.29
14-Apr-00 106.58 3.72 3.49
4 down days on SPY and today is Friday - Variant

SPY is down for four days in row
Today is Friday
Go Long at close and exit at the close two trading days later
Example trade
On 28th Dec 2012, which was a Friday, SPY was down for four days in row, and the trade
outcome for the long entered at close on 28th Dec 2012 and exiting on 2nd Jan 2013 was a
5.97 points gain or 4.3%




T-Test 3.30
Date Entry Date Exit P/L P/L %

28-Dec-12 138.68 02-Jan-13 144.7 5.97 4.3
18-May-12 126.25 22-May-12 128.6 2.39 1.89
25-Nov-11 112.01 29-Nov-11 115.6 3.57 3.19
29-Jul-11 123.87 02-Aug-11 120.2 -3.68 -2.97
13-Aug-10 101.7 17-Aug-10 102.9 1.2 1.18
30-Jul-10 103.54 03-Aug-10 105.4 1.83 1.77
02-Jul-10 95.96 07-Jul-10 99.63 3.67 3.82
07-May-10 103.97 11-May-10 108.2 4.27 4.11
02-Oct-09 94.87 06-Oct-09 97.67 2.8 2.95
22-May-09 81.55 27-May-09 82.15 0.6 0.74
20-Feb-09 70.42 24-Feb-09 70.48 0.06 0.09
10-Oct-08 79.85 14-Oct-08 90.09 10.24 12.82
18-Jan-08 117.3 23-Jan-08 118.9 1.6 1.36
04-Jan-08 125.52 08-Jan-08 123.4 -2.14 -1.7
03-Nov-06 118.42 07-Nov-06 120.2 1.8 1.52
09-Jun-06 107.76 13-Jun-06 105.4 -2.4 -2.23
06-Aug-04 88.85 10-Aug-04 90.13 1.28 1.44
07-Feb-03 67.77 11-Feb-03 67.78 0.01 0.01
21-Sep-01 77.53 25-Sep-01 81.09 3.56 4.59
09-Feb-01 104.1 13-Feb-01 104.4 0.34 0.33
15-Dec-00 103.42 19-Dec-00 102.7 -0.75 -0.73
01-Dec-00 104.12 05-Dec-00 108.5 4.34 4.17
10-Nov-00 107.6 14-Nov-00 109.6 1.97 1.83
23-Jun-00 113.41 27-Jun-00 114 0.62 0.55
14-Apr-00 106.58 18-Apr-00 113.2 6.64 6.23
3 day rally on SPY and today is Friday

SPY is up for three days in row
SPY gained by more than 0.5% in all those days
Today is Friday
Go short at close and buy to cover at the close next trading day
Example trade
This is kind of symmetrical pattern to the trading strategy 4 down days on SPY and today
is Friday
On 16th Sep 2011, which was a Friday, SPY gained 0.59%, the prior two days, as on 15th Sep
2011, and 14th Sep 2011, SPY gained 1.72% and 1.38% respectively. The trade outcome for the
short entered at close on 16th Sep 2011 and exiting on 19th Sep 2011 was a 1.91points gain or
1.63%




T-Test -2.39
Date Gain t-1 gain t-2 gain Close P/L P/L %

16-Sep-11 0.59 1.72 1.38 116.99 1.16 0.99
01-Jul-11 1.48 0.96 0.85 128.27 0.11 0.09
03-Sep-10 1.29 0.93 2.99 104.12 1.17 1.12
09-Jul-10 0.75 0.99 3.15 101.37 -0.06 -0.06
21-Aug-09 1.97 1.03 0.88 94.87 0.01 0.01
17-Apr-09 0.68 1.46 1.07 79.78 3.35 4.2
03-Apr-09 0.99 2.92 1.94 77.19 0.6 0.78
13-Mar-09 0.77 3.95 0.64 69.21 0.21 0.3
02-Jan-09 3.02 1.42 2.38 84.56 0.1 0.12
28-Nov-08 1.26 3.87 0.74 81.29 7.2 8.86
18-Jul-08 0.62 1.01 2.45 113.02 -0.06 -0.05
15-Jun-07 0.58 0.64 1.5 134.61 0.16 0.12
26-May-06 0.51 1.24 0.8 110.37 1.96 1.78
25-Feb-05 0.99 0.67 0.71 102.18 0.67 0.66
05-Nov-04 0.63 1.36 1.26 97.93 0.14 0.14
04-Jan-02 0.66 1.14 1.07 94.06 0.66 0.7
24-Mar-00 0.59 1.72 0.6 120.34 1.27 1.06
17-Mar-00 0.66 4.67 2.33 115.15 0.58 0.5
Monday 1% dips during long term uptrend on SPY

SPY close is above the 200 day moving average
Today is Monday
Go long at close and exit at open during the next trading day.
Example trade
On 24th Jun 2013, which was a Monday SPY closed down by -1.26% and the close 157.0, is
above the 200 DMA value , 149.24, and the trade outcome for the long entered on 24th Jun
2013 and exiting on 25th Jun 2013 open was a 1.42 points gain or 0.9%


Max Drawdown ($) -62.58 Max Drawdown % -0.36%


T-Test 4.00
Date Close Loss 200 DMA P/L P/L %

24-Jun-13 157.06 -1.26 149.24 1.42 0.9
15-Apr-13 154.3 -2.32 142.81 1.17 0.76
25-Feb-13 147.56 -1.90 138.57 0.71 0.48
04-Feb-13 148.09 -1.13 137.52 0.81 0.54
23-Jul-12 132.14 -1.01 127.66 0.09 0.07
25-Jun-12 128.45 -1.60 125.71 0.37 0.29
11-Jun-12 127.87 -1.27 124.91 0.37 0.29
14-May-12 130.5 -1.11 123.58 -0.09 -0.07
09-Apr-12 134.5 -1.12 122.61 -0.27 -0.2
11-Jul-11 126.4 -1.81 121.07 -0.27 -0.22
06-Jun-11 122.98 -1.06 118.56 0.64 0.52
23-May-11 125.86 -1.16 117.53 0.37 0.29
18-Apr-11 124.43 -1.12 114.5 0.2 0.16
26-Oct-09 98.97 -1.08 84.16 0.1 0.11
17-Aug-09 90.57 -2.47 80.11 0.2 0.23
22-Jun-09 82.25 -3.01 81.99 0.18 0.22
15-Jun-09 85.11 -2.28 82.76 0.3 0.35
27-Nov-06 120.05 -1.38 112.54 -0.16 -0.13
05-Jun-06 109.29 -1.45 107.82 0.07 0.07
10-May-04 90.17 -1.03 89.08 0.52 0.58
22-Mar-04 90.85 -1.27 87.03 0.49 0.54
15-Mar-04 91.81 -1.23 86.72 0.48 0.52
08-Mar-04 94.92 -1.22 86.34 0.12 0.12
22-Sep-03 84.27 -1.08 76.05 0.03 0.04
21-Jul-03 80.45 -1.24 73.75 0.34 0.42
23-Jun-03 80.57 -1.02 72.66 -0.17 -0.21
09-Jun-03 80.14 -1.01 72.29 0.18 0.22
19-May-03 75.57 -2.34 71.91 0.14 0.19
12-Jun-00 113.54 -1.17 109.5 -0.06 -0.05
24-Apr-00 111.48 -1.08 108.23 1.86 1.67
27-Mar-00 119.07 -1.06 107.26 -0.54 -0.45
13-Mar-00 108.34 -1.10 106.58 0.53 0.49
24-Jan-00 109.7 -2.84 105.75 0.14 0.13
Back to back 1% drops on SPY on Monday

SPY is down by more than 1% during current trading session &
SPY is down by more than 1% during previous trading session as well
Today is Monday
Example trade
On 3rd Oct 2011, which was a Monday, SPY closed down by -2.85%, during the previous
trading SPY closed by -2.51% as well. The trade outcome for the long entered on 3rd Oct
2011 and exiting at close on 4th Oct 2011 was a 2.32 points gain or 2.19%




T-Test 2.18
Date Close Loss Loss (t-1) P/L P/L %

03-Oct-11 105.83 -2.85 -2.51 2.32 2.19
07-Jun-10 98.58 -1.24 -3.52 1.06 1.08
26-Oct-09 98.97 -1.08 -1.15 -0.46 -0.46
30-Mar-09 72.18 -3.45 -1.81 0.67 0.93
02-Mar-09 64.22 -4.51 -2.22 -0.48 -0.75
12-Jan-09 79.09 -2.41 -2.14 0.15 0.19
17-Nov-08 77.12 -1.33 -4.98 1.45 1.88
27-Oct-08 75.75 -3.55 -5.06 8.85 11.68
06-Oct-08 94.49 -5.09 -1.35 -4.23 -4.48
17-Mar-08 113.96 -1.01 -1.56 4.73 4.15
10-Mar-08 113.69 -1.32 -1.03 4.09 3.6
17-Dec-07 128.18 -1.42 -1.27 0.71 0.55
10-May-04 90.17 -1.03 -1.65 0.76 0.84
22-Mar-04 90.85 -1.27 -1.44 -0.16 -0.18
27-Jan-03 69.22 -1.37 -2.62 0.51 0.74
11-Nov-02 71.35 -1.56 -1.21 0.57 0.8
07-Oct-02 63.97 -2.07 -1.83 1 1.56
30-Sep-02 66.12 -1.17 -3.48 3.18 4.81
05-Aug-02 67.42 -3.48 -2.24 2.27 3.37
22-Jul-02 66.16 -2.96 -3.51 -1.81 -2.74
06-May-02 84.59 -1.96 -1.09 -0.3 -0.35
12-Mar-01 93.24 -4.28 -2.96 1.53 1.64
Monday 2% dips during short term downtrend on SPY

SPY close is below the 20 day moving average
Today is Monday
Go long at close and exit at open during the next trading day.
Example trade
On 15th Apr 2013, which was a Monday, SPY dropped by -2.32% and the close 154.3, is below
the 20 DMA value, 155.3. The trade outcome for the long entered on 15th Apr 2013 and
exiting on 16th Apr 2013 open was 1.17 points gain or 0.76%




T-Test 2.53
Date Close Loss 20 DMA P/L P/L %
15-Apr-13 154.3 -2.32 155.33 1.17 0.76
03-Oct-11 105.83 -2.85 112.43 -1.52 -1.44
08-Aug-11 107.52 -6.51 123.61 1.73 1.61
17-Aug-09 90.57 -2.47 91.35 0.2 0.23
22-Jun-09 82.25 -3.01 85.22 0.18 0.22
02-Mar-09 64.22 -4.51 72.97 0.92 1.43
23-Feb-09 67.9 -3.58 75.18 0.59 0.87
12-Jan-09 79.09 -2.41 81.12 -0.2 -0.25
01-Dec-08 74.09 -8.86 79.64 1.23 1.65
27-Oct-08 75.75 -3.55 88.51 3.06 4.04
06-Oct-08 94.49 -5.09 106.77 1.91 2.03
29-Sep-08 100.5 -7.83 109.87 1.92 1.91
22-Sep-08 109.46 -2.26 112.03 -0.41 -0.38
15-Sep-08 107.73 -4.76 113.59 -2.59 -2.4
25-Aug-08 113.95 -2.03 114.93 0 0
26-Nov-07 124.54 -2.21 130.43 0.7 0.56
19-May-03 75.57 -2.34 75.83 0.14 0.19
31-Mar-03 69.12 -2.28 69.27 0.42 0.6
10-Mar-03 66.06 -2.41 68.03 0.13 0.2
09-Dec-02 72.35 -2.76 74.17 0.42 0.58
07-Oct-02 63.97 -2.07 68.89 0.55 0.86
05-Aug-02 67.42 -3.48 71.08 1.18 1.74
22-Jul-02 66.16 -2.96 75.62 0.28 0.43
03-Jun-02 83.71 -2.65 86.71 -0.17 -0.21
04-Feb-02 87.85 -2.49 90.9 -0.36 -0.41
29-Oct-01 85.64 -2.59 86.27 -0.08 -0.1
17-Sep-01 82.81 -5.23 91.23 0.03 0.04
02-Apr-01 90.42 -2.13 93.21 -0.18 -0.2
12-Mar-01 93.24 -4.28 100.23 1.04 1.12
24-Jan-00 109.7 -2.84 112.94 0.14 0.13
Monday 2% rallies during short term uptrend on SPY

SPY is up by more than 2% during current trading session
SPY close is above the 20 day moving average
Today is Monday
Go short at close and buy to cover at open during the next trading day.
Example trade
On 10th Oct 2011, which was a Monday, SPY gained by 3.34% and the close 115.2, is above 20
DMA value, 112.08. The trade outcome for the short entered on 10th Oct 2011 and exiting on
11th Oct 2011 open was 0.68 points gain or 0.59%

The trading strategy hasnt generated, as many trades as to my preference, but the idea is ,
it is a symmetrical trade to that presented earlier Monday 2% dips during short term
downtrend on SPY




T-Test -2.77
Date Close Gain 20 DMA P/L P/L %

10-Oct-11 115.12 3.34 112.08 0.68 0.59
29-Aug-11 116.24 2.88 112.99 0.51 0.44
02-Aug-10 105.88 2.26 102.24 0.27 0.25
09-Nov-09 101.43 2.28 99.3 0.24 0.24
01-Jun-09 86.82 2.42 83.22 0.34 0.39
18-May-09 83.58 2.84 81.24 0.05 0.05
04-May-09 83.26 3.40 78.45 0.29 0.35
23-Mar-09 75.32 7.17 67.83 0.89 1.19
08-Dec-08 82.11 3.49 77.77 0.58 0.7
24-Mar-08 120.26 2.00 118.1 -0.12 -0.1
16-Jun-03 82.92 2.11 79.18 -0.33 -0.4
14-Apr-03 72.55 2.05 71.33 0.09 0.12
17-Mar-03 70.5 3.15 68.04 -0.3 -0.42
19-Aug-02 76.78 2.33 71.48 0.46 0.6
11-Dec-00 109.17 3.48 106.54 0.34 0.32
Overnight edge when SPY gains more than what it had lost during
previous day

SPY during the previous trading day lost more than 1.5%
During the current trading session SPY, gained more than what it had lost during
previous trading day.
Go long at close and exit at open during the next trading day
Ps: while modelling the above trading strategy, a mistake that one could do is, write
something like below
Change [0] >1.5 & Change [1] <-1.5
Change [0] being the current days change %, while Change [1] being the previous trading
change %
Please take care to writing something like below
Change [1] <-1.5 & Change [0])>Abs (Change [1])
Abs (Change [1] is the absolute change % for the previous trading day.
Example trade
On 17th Oct 2011 SPY had lost, -1.91%, and on 18th Oct 2011 SPY gained 1.95 % recovering the
entire losses from previous trading day, thus meeting our trading system rules.
The trade outcome for the long entered on 18th Oct 2011 close and exiting on 19th Oct 2011
was a 0.19 points loss or -0.16%




T-Test 1.91
Date Close Gain Loss (t-1) P/L P/L %

18-Oct-11 118.01 1.95 -1.91 -0.19 -0.16
11-Aug-11 112.38 4.49 -4.42 1.02 0.91
02-Jun-10 103.1 2.60 -1.68 0.3 0.29
29-Oct-09 98.72 2.14 -1.89 -0.32 -0.33
23-Mar-09 75.32 7.17 -2.12 -0.89 -1.19
24-Feb-09 70.48 3.80 -3.58 -0.31 -0.45
05-Dec-08 79.34 3.08 -2.31 2.17 2.74
13-Nov-08 82.26 6.24 -4.41 -1.58 -1.92
28-Oct-08 84.6 11.68 -3.55 0 0
13-Oct-08 91.45 14.53 -2.43 3.02 3.3
16-Dec-02 74.09 2.58 -1.57 -0.22 -0.3
27-Nov-02 76.22 2.82 -1.91 0.42 0.55
25-Oct-02 72.92 2.09 -2.04 0.76 1.05
10-Oct-02 65.18 3.23 -2.82 1.19 1.83
25-Sep-02 68.19 2.48 -1.61 0.55 0.8
14-Aug-02 74.22 3.64 -1.81 0.5 0.67
24-Jul-02 68.18 5.95 -2.74 -0.35 -0.52
13-May-02 86.51 2.03 -1.89 1.41 1.63
19-Mar-01 92.91 2.03 -2 0.44 0.47
03-Jan-01 106.6 4.81 -1.81 -0.05 -0.05
13-Oct-00 108.33 3.33 -2.49 -0.11 -0.11
22-Sep-00 114.41 1.82 -1.52 0.52 0.46
11-May-00 110.72 2.28 -2.25 0.42 0.38
07-Jan-00 113.93 5.80 -1.61 0.39 0.34
3% intraday breakouts on Mondays and Tuesday

SPY starts trading at more than 3% above previous close
Go long at 3% from previous close level ( if it trades there)
Exit at close during the same trading days close
Important point to consider during the intraday trading, unless otherwise both intraday high
and intraday low are in between the desired entry point an entry is not possible. So it is
important to check whether the desired entry point is in between the intraday high and
intraday low. Usually an entry is not possible during the un-filled full gap ups/downs.
Throughout this book we consider the above important check whether or not an entry is
possible during our historical testing period.
Example trade
On 20th Dec 2011, the OHLC levels were 118.37, 120.27, 116.62 and 120.07, and the previous
days close was 116.54. The trade outcome of going long 3% above previous close, 120.04
and exiting at close was a gain of 0.03 points or 0.03%




T-Test 3.09
Date High Low Close Entry P/L P/L %

20-Dec-11 120.27 116.62 120.07 120.04 0.03 0.03
28-Nov-11 115.7 114.39 115.25 115.37 -0.12 -0.1
10-Oct-11 115.17 113.28 115.12 114.74 0.38 0.33
23-Aug-11 111.64 107.82 111.52 111.21 0.31 0.28
09-Aug-11 112.67 105.61 112.52 110.75 1.77 1.6
04-May-09 83.31 80.97 83.26 82.94 0.32 0.39
23-Mar-09 75.38 71.74 75.32 72.39 2.93 4.05
17-Mar-09 71.27 68.63 71.11 71.07 0.04 0.06
10-Mar-09 65.83 63.10 65.65 63.81 1.84 2.89
24-Feb-09 70.91 67.95 70.48 69.94 0.54 0.78
16-Dec-08 83.03 79.56 82.9 81.56 1.34 1.65
08-Dec-08 83.36 79.48 82.11 81.72 0.39 0.48
02-Dec-08 77.14 74.03 76.94 76.31 0.63 0.82
24-Nov-08 78.49 72.51 76.72 73.90 2.82 3.81
04-Nov-08 91.01 87.26 90.6 90.25 0.35 0.39
28-Oct-08 85.03 76.27 84.6 78.02 6.58 8.43
20-Oct-08 89.42 84.90 89.16 86.62 2.54 2.93
14-Oct-08 95.21 87.62 90.09 94.19 -4.1 -4.36
13-Oct-08 91.45 81.16 91.45 82.25 9.2 11.19
30-Sep-08 105.39 99.73 104.66 103.52 1.15 1.11
08-Sep-08 115.04 111.61 113.92 114.97 -1.05 -0.91
01-Apr-08 122.15 119.17 121.94 121.33 0.61 0.5
18-Mar-08 118.74 115.45 118.69 117.38 1.31 1.12
11-Mar-08 117.89 114.54 117.78 117.10 0.68 0.58
13-Nov-07 131.04 128.31 130.84 130.78 0.06 0.05
17-Mar-03 70.64 67.61 70.5 70.40 0.1 0.14
15-Oct-02 71.73 70.21 71.71 70.47 1.24 1.76
01-Oct-02 69.34 65.86 69.3 68.10 1.2 1.76
06-Aug-02 70.74 68.50 69.69 69.44 0.25 0.36
29-Jul-02 72.71 70.26 72.25 70.96 1.29 1.82
24-Sep-01 80.63 78.95 80.26 79.86 0.4 0.51
11-Dec-00 109.9 107.67 109.17 108.67 0.5 0.46
05-Dec-00 108.88 105.85 108.46 108.16 0.3 0.28
14-Nov-00 109.96 107.89 109.57 109.95 -0.38 -0.35
30-May-00 112.02 109.31 111.68 111.39 0.29 0.26
25-Apr-00 116.11 113.19 116.11 114.82 1.29 1.12
17-Apr-00 110.3 105.55 110.3 109.78 0.52 0.48
Gap Plays
What is a Gap?
A gap is a change in price levels between the close and open of two consecutive days. Why
do you think these gaps occur? Well, they do so for a variety of reasons; they could be an
outcome of geopolitical developments, overnight earnings announcements, economic
developments and other market-related events that take place during the time when the
markets were closed for trading. These events often trigger significant price movement
away from the prior days closing price, resulting in a gap next morning.
Here are four types of gaps definition that am using in this chapter.
A Full Gap Up is defined as one when the opening price of a day is higher than the
previous days high price.
Open [0]>High [1]
A Gap Up is one when a days opening price is higher than the previous days close.
Open [0]>Close [1]
A Full Gap Down is defined as one when the opening price of a day is lower than the
previous days low price.
Open [0] <Low [1]
A Gap Down is one when a days opening price is lower than the previous days close.
Open [0] <Close [1]
I would be considering the following types of gap fill definitions in this book.
A Filled Full Gap Up is one, when price comes back all the way to the previous days
high price.
Low [0] <High [1]
A Filled Full Gap Down is one, when the price comes back all the way to the previous
days low price.
High [0]>Low [1]
A Filled Gap Up is as one when the price comes back all the way to the previous days
closing price.
Low [0] < Close [1]
A Filled Gap Down is one when the price comes back all the way to the previous days
closing price.
High [0]>Close [1]

Monday Unfilled Full Gap Downs

SPY posts an unfilled full gap down
Today is Monday
Go long at the close
Exit at open during the next trading session
Example trade
On 25th Jun 2012, the OHLC levels were, 129.16, 129.21, 127.99 and 128.45. The previous days
low was 129.72. The trade outcome of going long at close on 25th Jun 2012 and exiting on
open on 26th Jun 2012 was a gain of 0.37 points or 0.29%

Gross profit 9.52 Gross Loss -1



T-Test 3.43
Variant: you could consider tweaking the above trading systems with exit set to close at five
trading days later for an average profit % per trade of 1.4%, with an outlier adjusted profit
factor of 2.45
Prev
Date High Low Close P/L P/L %
25-Jun-12 129 129.72 128.5 0.37 0.29
23-Apr-12 133 134.16 133.1 0.12 0.09
21-Nov-11 116 116.95 115.2 -0.25 -0.22
11-Jul-11 128 127.76 126.4 -0.27 -0.22
23-May-11 126 127.10 125.9 0.37 0.29
31-Aug-09 94.5 94.59 94.4 -0.48 -0.51
17-Aug-09 91.2 91.86 90.57 0.2 0.23
22-Jun-09 84 84.32 82.25 0.18 0.22
30-Mar-09 73.2 74.49 72.18 0.71 0.98
01-Dec-08 79 79.84 74.09 1.23 1.65
06-Oct-08 97.1 98.96 94.49 1.91 2.03
02-Jun-08 125 124.91 124 0.35 0.28
17-Dec-07 130 129.97 128.2 0.9 0.71
14-Jun-04 94.3 94.39 93.81 0.56 0.6
10-May-04 90.9 91.11 90.17 0.52 0.58
22-Mar-04 91.6 92.00 90.85 0.49 0.54
17-Nov-03 86.4 86.52 86.23 0.25 0.29
22-Sep-03 84.6 84.97 84.27 0.03 0.04
09-Jun-03 80.8 80.85 80.14 0.18 0.22
22-Apr-02 90.2 90.27 89.02 0.08 0.09
17-Sep-01 84.5 85.51 82.81 0.03 0.04
12-Mar-01 96.7 97.21 93.24 1.04 1.12
Tuesday 0.5% Unfilled Gap Ups

SPY posts an unfilled full gap up
The gap up size is more than 0.5%
Today is Tuesday
Go Short at the close , buy to cover at close next trading session
The gap size is defined as todays low expressed in percentage terms of previous days close.
For ex: 0.5% unfilled gap up, is when current low is greater than previous days close by more
than 0.5%.
Example trade
On 16th Apr 2013, the OHLC levels were, 155.47, 156.66, 155.09, and 156.58. The previous
days close was 154.03. The value (Low [0]-Close [1])*100/Close [1], which is (155.09-
154.03)*100/154.03 gives us a gap size of 0.51%.
The trade outcome of going short at close on 16th Apr 2013 and buying to cover on 17th Apr
2013 was a gain of 2.29 points or 1.46%.




T-Test -2.27
Date Low Prv Close Close P/L P/L %

16-Apr-13 155.09 154.30 156.6 2.29 1.46
05-Feb-13 148.84 148.09 149.6 -0.11 -0.07
10-Jan-12 124.94 124.03 125.1 -0.07 -0.06
03-Jan-12 123.46 121.59 123.5 -0.19 -0.15
27-Sep-11 112.49 111.91 113.2 2.31 2.04
19-Jul-11 125.77 125.10 127.1 0.08 0.06
14-Jun-11 122.77 121.71 123.3 2.19 1.78
01-Feb-11 122.77 122.11 124.1 0.23 0.19
05-Oct-10 108.25 107.38 109.5 0.01 0.01
17-Aug-10 102.23 101.65 102.9 -0.19 -0.18
13-Jul-10 102.28 101.43 103 0.01 0.01
15-Jun-10 102.88 102.34 104.7 0.03 0.03
01-Dec-09 102.5 101.77 103 0.05 0.05
06-Oct-09 96.93 96.29 97.67 -0.27 -0.28
10-Mar-09 63.1 61.95 65.65 -0.42 -0.64
28-Oct-08 76.27 75.75 84.6 0.62 0.73
01-Apr-08 119.17 117.80 121.9 -0.08 -0.07
18-Mar-08 115.45 113.96 118.7 2.94 2.48
11-Mar-08 114.54 113.69 117.8 1.1 0.93
13-Nov-07 128.31 126.97 130.8 0.37 0.28
03-Apr-07 125.13 124.48 125.8 -0.14 -0.11
15-Aug-06 110.44 109.76 111.1 -0.93 -0.84
17-Feb-04 95.59 95.06 95.92 0.43 0.45
15-Oct-02 70.21 68.42 71.71 1.74 2.43
06-Aug-02 68.5 67.42 69.69 -1.21 -1.74
14-May-02 87.42 86.51 88.4 0.35 0.4
16-Apr-02 89.56 88.68 90.79 0.19 0.21
13-Nov-01 90.2 89.29 91.29 -0.09 -0.1
10-Apr-01 91.19 90.70 92.36 -0.06 -0.06
06-Mar-01 99.09 98.50 99.56 -0.71 -0.71
05-Dec-00 105.85 105.01 108.5 1.74 1.6
14-Nov-00 107.89 106.75 109.6 -0.33 -0.3
30-May-00 109.31 108.15 111.7 -0.24 -0.21
25-Apr-00 113.19 111.48 116.1 1.32 1.14
08-Feb-00 112.28 111.3 112.8 2.37 2.1
Moving onto intraday trading strategies: 1% Full gap down openings

SPY opens with a Full Gap Down &
SPY opens less than 1% below previous trading days low
Today is NOT Monday
Go long at open and exit at close on the same day
Example trade
On 1st Nov 2011, SPY opened at 117.48, which is 2.63% below the previous trading days low
of 120.65. The trade outcome of going long at open on 1st Nov 2011 and exiting at close was
a loss of 0.03 points or -0.02%.




T-Test 3.16
Date Open Prv Low Close P/L P/L %

01-Nov-11 117.48 120.65 117.5 -0.03 -0.02
04-Oct-11 104.31 105.71 108.2 3.84 3.68
22-Sep-11 109.04 112.10 108.7 -0.38 -0.34
06-Sep-11 109.56 112.48 112.1 2.49 2.27
02-Sep-11 113.43 115.68 112.9 -0.55 -0.48
18-Aug-11 111.59 113.71 109.7 -1.91 -1.71
23-Jun-11 121.79 123.16 122.9 1.09 0.9
15-Mar-11 120.13 122.47 122 1.87 1.56
24-Aug-10 99.48 100.53 99.09 -0.39 -0.4
12-Aug-10 101.08 102.46 102 0.92 0.91
29-Jun-10 99.55 100.60 97.85 -1.7 -1.71
25-May-10 98.23 100.57 100.8 2.53 2.58
21-May-10 98.97 100.43 102 2.99 3.02
27-Nov-09 100.35 102.58 101.4 1.08 1.08
01-Oct-09 95.35 96.84 95.32 -0.03 -0.03
02-Jul-09 83.96 84.95 82.74 -1.22 -1.45
21-May-09 81.96 82.83 81.73 -0.23 -0.28
27-Feb-09 67.32 68.70 67.25 -0.07 -0.11
20-Feb-09 69.79 70.96 70.42 0.63 0.9
17-Feb-09 72.92 75.26 72.06 -0.86 -1.17
12-Dec-08 77.19 78.84 80.29 3.1 4.02
24-Oct-08 75.85 77.42 78.54 2.69 3.55
22-Oct-08 84.09 85.91 81.78 -2.31 -2.75
10-Oct-08 78.28 81.43 79.85 1.57 2.01
08-Oct-08 87.99 89.92 87.98 -0.01 -0.01
16-Sep-08 105.14 107.55 109.5 4.4 4.18
13-Mar-08 115.13 116.50 116.9 1.81 1.57
05-Feb-08 120.75 122.26 119.1 -1.61 -1.33
22-Jan-08 112.99 116.45 116.1 3.12 2.76
07-Mar-03 66.3 67.00 67.69 1.39 2.1
06-Dec-02 72.86 73.64 74.4 1.54 2.12
24-Jul-02 62.88 64.19 68.18 5.3 8.43
19-Jul-02 69.83 70.62 68.18 -1.65 -2.36
26-Jun-02 76.62 78.50 78.65 2.03 2.65
14-Jun-02 80.45 81.27 81.32 0.87 1.09
07-Jun-02 81.63 82.73 82.88 1.25 1.53
21-Sep-01 75.14 78.26 77.53 2.39 3.18
20-Dec-00 101.57 102.67 99.69 -1.88 -1.85
18-Oct-00 104.44 105.85 105.7 1.28 1.22
27-Apr-00 112.07 114.41 114.4 2.35 2.1
1% Gap and go on Tuesdays

SPY opens with a gap up opening &
SPY opens more than 1% above previous trading days close
SPY closed down during the previous trading session.
Today is Tuesday
Go long at open and exit at close on the same day
Example trade
On 28th May 2013, which was a Tuesday, SPY opened at 166.16, which is 1.04% above the
previous trading days close of 166.44. SPY lost -0.09% during the previous trading day.
The trade outcome of going long at open on 28th May 2013 and exiting at close was a loss of
0.74points or -0.44%.




T-Test 2.03
Date Open Prv Close Close P/L P/L %

28-May-13 166.16 164.44 165.4 -0.74 -0.44
03-Jan-12 123.78 121.59 123.5 -0.25 -0.2
20-Dec-11 118.37 116.54 120.1 1.7 1.43
09-Aug-11 109.25 107.52 112.5 3.27 2.99
06-Jul-10 97.31 95.96 96.59 -0.72 -0.74
09-Feb-10 99.71 98.55 99.79 0.08 0.08
10-Mar-09 63.23 61.95 65.65 2.42 3.83
03-Mar-09 65.14 64.22 63.74 -1.4 -2.15
16-Dec-08 82.9 79.18 82.9 0 0
02-Dec-08 75.32 74.09 76.94 1.62 2.16
28-Oct-08 78.81 75.75 84.6 5.79 7.35
07-Oct-08 96.4 94.49 90.26 -6.14 -6.37
30-Sep-08 102.42 100.50 104.7 2.24 2.18
18-Mar-08 116.02 113.96 118.7 2.67 2.3
11-Mar-08 116.11 113.69 117.8 1.67 1.44
19-Feb-08 121.44 120.04 120.4 -1.07 -0.88
13-Nov-07 128.45 126.97 130.8 2.39 1.86
06-Mar-07 121.04 119.79 121.8 0.8 0.66
06-Aug-02 68.6 67.42 69.69 1.09 1.6
16-Apr-02 89.59 88.68 90.79 1.2 1.34
13-Nov-01 90.41 89.29 91.29 0.88 0.98
13-Mar-01 94.28 93.24 94.77 0.49 0.52
14-Nov-00 108.26 106.75 109.6 1.31 1.21
25-Apr-00 113.34 111.48 116.1 2.77 2.44
08-Feb-00 112.54 111.30 112.8 0.27 0.24
1% Full gap up opening, faded by others

SPY opens with a 1% full gap up opening ( open is greater than 1% previous days
high)
Go Long at previous days high , if we get an entry at previous days high
Exit at close the same day
Repeating one more time what I said earlier in the book
Important point to consider during the intraday trading, unless otherwise both intraday
high and intraday low are in between the desired entry point an entry is not possible. So
it is important to check whether the desired entry point is in between the intraday high
and intraday low. Usually an entry is not possible during the un-filled full gap
ups/downs.
Example trade
On 7th June 2012, SPY opened at 129.88, which is 1.09% above the previous trading days
high of 128.48. During the intraday SPY moves back to 128.48 and provides an entry
opportunity for us to go long on SPY. The trade outcome of going long at open previous
trading days high on 7th June 2011 and exiting at close was a gain of 0.02 points or 0.02 %.




T-Test 2.67
Date Open Low Prv High Close P/L P/L %

07-Jun-12 129.88 128.24 128.48 128.5 0.02 0.02
30-Nov-11 118.89 115.53 116.49 120.33 3.84 3.29
04-Nov-10 114.48 113.25 113.30 115.41 2.11 1.87
15-Jul-09 84.58 83.54 83.55 85.92 2.37 2.83
02-Apr-09 76.11 74.32 74.59 76.43 1.84 2.47
16-Dec-08 82.9 79.56 80.44 82.9 2.46 3.05
08-Dec-08 81.51 79.48 79.78 82.11 2.33 2.92
24-Nov-08 73.91 72.51 73.00 76.72 3.72 5.1
10-Nov-08 85.91 82.04 84.82 83.58 -1.24 -1.46
04-Nov-08 89.38 87.26 88.14 90.6 2.46 2.79
14-Oct-08 94.47 87.62 91.45 90.09 -1.36 -1.49
08-Sep-08 114.86 111.61 112.10 113.92 1.82 1.63
19-Feb-08 121.44 119.56 120.11 120.37 0.26 0.22
17-Aug-07 127.94 124.33 125.70 127.25 1.55 1.23
07-Apr-03 73.69 71.75 72.26 71.82 -0.44 -0.61
17-Sep-02 73.15 70.63 72.35 70.69 -1.66 -2.29
17-Jan-01 106.47 104.73 105.17 105.37 0.2 0.19
Narrow and Wide Range Bars
NR4/NR7, WS4/7, Inside day are concepts explained in the book, Day Trading with Short
Term Price Patterns and Opening Range Breakout, by Toby Crabel. Back in 1999, when I
first read this book I was filled with an amazing a-ha feeling after reading it. Let me
describe that feeling.
Have you heard of or seen Wordlock? Here is a picture.
When I saw the Wordlock for the first time, I had the same amazing a-ha feeling. Why?
How many times you have seen a great idea and been amazed at its simplicity. When I saw
the Wordlock for the first time, I was similarly amazed. Here is why.
The number-based combination lock that we use has been in existence for more than one
hundred and fifty years. It has two serious problems that I can think of. Firstly, we
ourselves often forget the number combination that we put for the lock, particularly if we
are not using it frequently. In order to overcome this, we might decide to put an easy-to-
remember number. For instance, the Bond, James Bond in every one of us tells to use 007
for number lock. But this leads to the second problem; easy-to-remember numbers are
easier for other people to crack with some luck or practice. So the very purpose of using
number locks, namely securing your valuables, is lost. Imagine your luggage in the hands
of a thief capable of breaking a number lock in less than five seconds.
Enter Wordlock. The person behind creating and patenting Wordlock is Todd Basche who
has twenty years of experience in the software industry. His last job before he started a
company to manufacture Wordlock was at Apple, where he was responsible for creating
iTunes. The fact that such a simple invention had not been thought of by any of the
worlds existing lock manufactures for over 150 years gives rise to that amazing a-ha
feeling. Beside my a-ha feeling the Wordlock won the Staples invention quest in 2005
and the U.S. patent and trademark office included Wordlock among the Top 100 New
Inventions, a distinction it won at the Invent Now America competition.
Seasonality
As September goes
February Effect
Sayonara
After you have read this material and studied some of the simple and yet high probability
trading patterns you may be filled with enthusiasm and a belief that you are now ready to
conquer the markets. We suggest that you take the time to re-read, review and yourself
test all the patterns from this book. It is vital that you understand the patterns for yourself.
Take the time to test the patterns and try multiple combinations of the various patterns
discussed in each chapter.
However, before you set out to do that, we want to caution you be patient and do
sufficient research instead of getting prematurely tempted by immediately using the
patterns presented in this book. Do your own research, practice few paper trades before
making a trading plan with the trading patterns presented in this book & finally dont
artificially force trades just because the patterns presented in the book are high
probabilistic in nature in the past. You need to understand the risks associated in short
term trading and the current market conditions...
Closing this book does not mean having to say good-bye. You may have questions, if so,
you can always email me at paststat@gmail.com , Ill try to respond to each and every mail
I receive if I only know the answer.
Raising funds for brighter futures

Chris Hohn's The Children's Investment Fund Foundation vs Marc Benioff's
Compassionate Capitalism (mail replies and few vodka might resolve this).
I wish you success. Trade intelligently!
-Kora Reddy
Glossary
Some of the following terms are used throughout this book. You might want to glance
through this glossary to see how they are defined for the purposes of this book. Some
additional terms (patterns) which are not covered in the book are covered here too.
2 BAR NR (2BNR): The narrowest range from high to low of any two-day period relative to
any two-day period within the previous twenty days.
3 BAR NR (3 BNR) : The narrowest range from high to low of any three-day period
relative to any three-day period within the previous twenty days.
4 BAR NR (4BNR): the narrowest range from high to low of any three-day period relative to
any three-day period with in the previous thirty days.
8 BAR NR (8BNR): The narrowest range from high to low of any eight-day period relative
to any eight-day period within the previous forty days.
Accumulation: The establishment of an investment or speculative position by

professional interests in anticipation of an advance in price.
Automatic Rally: A technical rebound that occurs just after a selling climax, usually very
short-lived but sometimes produces large moves.
Bar Chart: Shows the open, high, low and close of a market.
Breakout: A decisive move through an area of resistance or support, usually characterized

by a wide spread day, and close of the day in the direction of the breakout.
Bulge: A sudden expansion of price or volume; use 20 days as a reference when classifying
a bulge day.
Climax Buying: A situation characterized by the highest intensity of speculative demand

occurring within an uptrend. Usually accompanied by a WS day and the highest volume
registered within the uptrend. This situation only occurs after the move has been in effect
for some time. This condition marks the approaching end of a particular uptrend.
Climax Selling: A situation characterized by the highest intensity of speculative supply

occurring within a downtrend. Usually accompanied by a WS day and the highest volume
registered within the downtrend. This situation only occurs after the move has been in
effect for some time. This condition marks the approaching end of a particular downtrend.
Close: The last trade registered in the time period under consideration.
Congestion: A series of trading days with no visible progress in either direction. Usually
associated with narrow range days or non-trend days
Contraction: Market behaviour represented by a congestion or resting period either

short-term (ID) or long-term (8 Bar NR) and usually reaching its narrowest phase at the
end of the period.
Contraction / Expansion: Suggests that the market as a phenomenon is constantly
changing from a period of movement to a period of rest and back to a period of
movement. This interchange between the phases of motion and rest, congestion and
trend, or trading range and breakout, are constantly taking place, with one phase directly
responsible for the others existence. This phenomenon is most apparent when viewing the
market from the context of price moves off the open.
Distribution: The establishment of an investment or speculative position by

professionals interests in anticipation of a decline in price.
Downtrend: A series of lower lows and lower highs.
Early Entry: A large price movement in one direction within the first fifteen minutes after
the open of the daily session, the open should act as one extreme. Probability of
continuation is 70%.
Early Entry Failure: After Early Entry, a loss of momentum and subsequent shift in
momentum counter to the direction of the early entry resulting in a move back through
the early established extreme.
Expansion: Market action that occurs at the conclusion of contraction and is

characterized by WS days or WS7 days. This action usually is the beginning of the next
trend.
Fade: A position taken opposite to the direction of the initial move off the open on a given
day. This is usually considered when the initial move off the open is in the opposite
direction of the prevailing trend and price pattern studies confirm the trend.
Gap: a day in which the daily range is completely above or below the previous days daily
range. When viewing intraday charts a gap may appear on just a higher or lower open
without exceeding the previous days high or low.
Gap Down: A day whose open is below the previous days low.
Gap Reversal: The low of the last day is completely above the preceding days action with
the close reversing at least two closings; with a close above mid-range and the open. This
records a very strong change in sentiment
Gap Up: Todays open is greater than yesterdays high.
Higher High: Todays high is above yesterdays high.
Higher Low: Todays low is below yesterdays low.
Hook Bear: A day in when the open is below the previous days low and the close is above
the previous days close with a narrow range.
Hook Bull: A day when the open is above the previous days high and the close is below
the previous days close with a narrow range.
Hypodermics: A deliberately forced, rapid mark-up in price. The purpose of hypodermics

is the stimulation of uninformed buying in order to facilitate distribution.
Initial Protective Stop: An order placed right after a trade is entered in order to help
control risk.
Inside Day (ID): An NR day this has its daily range completely within the previous daily
range.
Lap Down: Todays open is lower than yesterdays close but not lower than yesterdays
low.
Lap Up: Todays open is higher than yesterdays close but not higher than yesterdays
high.
Last Point of Support: A narrow, low volume price range (possibly 2 Bar NR) that occurs
just prior to the commencement of a mark up phase. The market is said to be in
equilibrium at such a juncture.
Limit Order: An order to buy or sell at a specified price.

Long: A buy position that seeks to profit in the anticipation of the market rising.
Lower High: A high that is lower than the previous days high.
Lower Low: A low that is lower than the previous days low.
Market: Any organized exchange where buyers and sellers can meet to exchange their
goods, in this case futures contracts.
Market Order: An order to be executed immediately at the asking price for buys and at
the bid price for sales.
Moving Average: The average price of a security over a given period; for instance, a 10-day
moving average would be the sum of the previous ten days prices divided by 10.
Non-Trend Day: The first hours range comprises 100% of the days range and all
subsequent time brackets trade over the same prices as the initial balance area.
Characterized by a narrow daily range and low volume
NR4: is a daily range that is narrower than the previous three days compared individually
to the day in question.
NR7: is a daily range that is narrower than the previous three days compared individually
to the day in question.
Open: is the first trade registered in the time period under consideration.
Opening Range (OR): is the first thirty seconds of trade of each trading day.
Opening Range Breakout (ORB): is a trade with entry taken at a predetermined amount
above or below the opening range. When the predetermined amount (The Stretch) is
computed, a buy-stop is placed that amount above the high of the opening range and a sell
stop is placed the same amount below the low of the opening range. The first stop that is
traded is the position and an (ORB).
ORB Preference (ORBP): The procedure is similar to the (ORB) but the only order
entered is the stop in the direction of the entry. The protective stop is entered only after
the trade has been entered. The exception to this is if the market trades to the stretch in
the opposite direction first, then the (ORBP) is nullified and the resting order is cancelled.
Outside Day (OD): is a day in which the high and low prices are, respectively, higher and
lower than those of the preceding day.
Pivot High: A high surrounded by two lower highs. Can also be two equal (or in rare cases
three) highs surrounded by two lower highs.
Pivot Low: A low surrounded by two higher lows. Can also be two equal (or in rare cases
three equal) lows surrounded by two higher lows.
Poor Close: The market closes in the bottom 20% of its range;
Preliminary Supply: is a high volume, wide spread day that produces a short-lived
reaction in a mark up phase. This occurs sometime before the buying climax and is the
first sign of supply.
Protective Buy Stop: Used to help control losses when shorting stocks. The order is
placed above the current price of the stock. It becomes a market order if the stock trades
at or above the specified price.
Protective Sell Stop: Used to help control losses when buying stocks. The order is placed
above the current price of the stock. It becomes a market order if the stock trades at or
above the specified price.
Rally: is a short-term advance in the price.

Range: is the difference between the high and low of a given day.
Range Mid: is the exact mid-point between the high and low of a given day.
Range Narrow (NR): is the smaller daily range relative to the previous day.
Range Wide Spread (WS): is an increased daily range relative to the previous day.
Reaction: is a short-term decline in the price.
Resistance: is opposition to advancing prices caused by an increase in available supply.
Reversal: Four Day Close (4DCR): After four closes in close proximity to each other a
(WS) day occurs with a close above / below the previous four closes, Close of (WS) should
be above / below opening and Mid Range
Reversal: Three Day Close (3DCR): the close is above/below the previous three days.
The high/low is above/below the previous three days. The low/high is above/below the
low/high of the last three days. The close is above/below the open and mid-range with a
(WS) bigger than the average of the last three days.
Reversal: Three Day High (3DHR) : Three narrow range days are followed by a wide
spread day closing above/below the high/low of the three day period. Close must be above
opening and mid-range for the day.
Shark: Two consecutive Inside Days
Short: A position that seeks to profit if a market drops in value, to sell
Shakeout: is a deliberately forced price reaction whose purpose is that of stimulating

public selling in order to facilitate the accumulation of speculative positions.
Show of Strength (SOS): A decisive rally after a secondary test of the low, taking the
market above the high of the automatic rally, usually accompanied by higher volume than
the previous rallies
Show of Weakness (SOW): A decisive break after a secondary test of the high, taking the
market below the low of the automatic reaction, usually accompanied by higher volume
than previous sell offs
Spring: occurs when price moves below a pivot bottom and a wide spread reversal ensues
as follows:
Two previous closes are reversed

Close is above pivot bottom
Close is above opening and mid-range
Daily range is greater than the previous days range.
Spring Board: is a condition in the price movement of a market that has completed
preparation and has been brought to point where the market may move into a mark up or
mark down period. A springboard can be recognized by the unusually narrow trade
relative to the previous days action.
Stepping Down: In a downtrend when the market holds similar sloping angles of
resistance off of successively lower pivot tops within the trend, generally, this indicates an
acceleration of the existing trend.
Stepping Up: in an uptrend when the market holds similar sloping angles of support off of
successively higher pivot bottoms within the trend, generally, this indicates an
acceleration of the existing trend.
Stop Order: For buys, an order placed above the current stock price that becomes a
market order if the stock trades at or above the order price. For sells, an order placed
below the current price of the stock that becomes a market order if the market trades at or
below the order price. Stop orders are normally used to help control risk but can also be
used to enter positions.
Stretch: is determined by looking at the previous ten days and averaging the sum of the
difference between the open for each day and the closest extreme to the open.
Strong Close: The stock closes within the top 20% of its range;
Supply: Product existing to sell in the market
Support: is opposition to declining prices caused by an increase in available demand.
Tail: A price period with the bulk of the trade and close for the period on one extreme
with very little trade on the other extreme, synonymous with Spike; sometimes forming
Upthrusts/Springs. It is the predecessor of most major reversals
Tail Top or Bottom: The market closes higher /lower for three days in the top/bottom
part of the trading range.
Terminal Shakeout: A congestion area taking place above and in the vicinity of an
important pivot top that ends with Spring-type action. The result is an extensive area of
accumulation with long-term bullish implications.
Terminal Upthrust: A congestion area taking place above and in the vicinity of an
important pivot top that ends with Spring-type action. The result is an extensive area of
distribution with long-term bearish implications.
Thrust: is a comparison between the price differences of successively lower pivot bottoms.
A reduction in the difference between pivot bottoms shows a momentum loss. An increase
in the difference with each lower bottom shows a momentum increase. The same analysis
can be applied to successively higher pivot tops.
Trailing Stop: A stop adjusted higher for long positions or lower for short positions as
the market moves in the favour of the trade. Used to help lock in profits for when the
market reverses.
Trend Day: is a wide spread day with the open and the close near opposite extremes.
Upthrust: occurs when price moves above a pivot top and a wide spread reversal ensues
as follows:
Two previous closes are reversed

Close is below pivot top
Close is below opening and mid-range
Daily range is greater than the previous days range.
Uptrend: A series of higher highs and higher lows
WS4: is a day with a daily range that is larger than any days range relative to the previous
four days
WS7: is a day with a daily range that is larger than any days range relative to the previous
six days. It indicates momentum.

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Probability Trading Setups

GAP PLAYS ................................................................................................................................63

ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a

This publication is designed to provide accurate and authoritative information in regard to

Authorization to photocopy items for internal or personal use, or in the internal or

The NFA requires us to state that HYPOTHETICAL OR SIMULATED PERFORMANCE

Err, have you counted and tested that?

- Brett Steenbargers Trading Psychology www.brettsteenbarger.com

- Jeff Boarman's http://ibankcoin.com/woodshedderblog

- Jeff Swanson's http://systemtradersuccess.com

- Michael Stokess http://marketsci.wordpress.com

- Oddmund Grtte's http://www.quantifiedstrategies.com

- Paul Hickeys http://www.bespokeinvest.com

- Rennie Yangs http://markettells.com

- Rob Hannas http://quantifiableedges.blogspot.com

- Ryan Detrick http://schaefferstradingfloor.com

- Scott Andrews http://www.masterthegap.com

- Tadas Viskantas Abnormal Returns www.AbnormalReturns.com

- Trading Markets www.TradingMarkets.com

& RSS aggregators

The buyer of this book

What you will learn from this book

What you will not find in this book.

No Gann, no divergences, no chart patterns , no pennants , no trend lines , no

How to use this book

It is important to initially trade a new concept or strategy on paper. Only by seeing

Whats in this book?

The book is organised into the following major chapters:

Introduction to backtesting metrics

Why no pictures in this book?

Why write this book instead of trading our own account.

System development and trading is a constantly evolving process. It is that process of

In addition, I like to correspond with an interested community of other developers,

What draws people to short term trading?

Here are some reasons that I can readily think of:

Lower trading commissions

Profit in either market direction

Why day trade or indulge in short term trading?

The profit potential

- Ed Seykota in Technical Analysis Magazine

Rule # 1: Trading is a Business

Plagiarised from the blog post http://bclund.com/2013/06/02/so-you-want-to-trade-for-a-

Rule # 2: Have a Trading Plan

If you fail to plan, you plan to fail

Step 4: Know your trading strategy like your best friend.

Rule # 4: Remain consistent

What do you think will happen?

Press your winners and not the losers.

Rule # 8: Use stop loss

As soon as a trade is initiated, you should have a protective stop loss.

So, what, then, is the solution?

Hence the old adage,

Rule # 9: Dont be obsessed by minute-by-minute market movements

Rule # 10: Avoid over-reliance on market gurus

Rule # 11: Maintain a trading log

Did I follow my trading plan today?

Rule # 12:Dont think this market stuff is easy

If the calculations that I made are right, there are 169,518,829,100,544,000,000,000,000,000

Paul Tudor Jones.

And the Rule # 14: Live by the rules

Why Backtest a trading strategy?

Quick answers to the question:

to determine whether a theory or hypothetical construct is valid in historical

Definition of backtesting from investopedia

Backtesting is a key component of effective trading-system development. It is