Trading Signal for SPY - Statistical Odds

OLTO Trading Mentor • August 23, 2021

1. Signal

⬆ Signal type: Long

Ἳ Probability: 69.04%

Ὅ Name: The price has broken its maximum value for the last month

⚒ Instrument: S&P 500 ETF (SPY)

Ἱ Timeframe: D1

Current time (America/New York): 2021-08-23 10:22:23

Ὄ Current price: 447.14 USD

Ὄ Optimal maximum holding period: until 2021-10-28 (66 days)

⛔ Optimal Stop Loss: 408.57 USD (3.5 model size)

✅ Optimal Take Profit: 524.28 USD (2.0 stop loss volume)

 Left: SPY chart for the last 3 months. The green dashed horizontal line is the optimal take proÛt for the

signal, the red dashed line is the optimal stop loss for the signal. Right: SPY chart for the last 23 days,

on the basis of which the signal was formed.

2. What does " The price has broken its

maximum/minimum value for the last month" signal

mean?

The price has broken its maximum/minimum value for the last month:

• A signal for price movement upward occurs when the maximum price for the last

month (22 working days) is broken.

• A signal for price movement downward occurs when the minimum price for the last

month (22 working days) is broken.

Left: "The price has broken its maximum/minimum value for the last month" pattern generates a Long

signal. Right: "The price has broken its maximum/minimum value for the last month" pattern generates

a Short signal

3. Statistical Odds for " The price has broken its

maximum/minimum value for the last month" signal

3.1. Search for the optimal maximum position holding period for

SPY

For the generated signal, we conducted an MFE/MAE test (see definition here) in

order to understand the most advantageous position holding time (in days), if this

signal is followed. The higher the values of the MFE/MAE curve of 1, the more

chances of getting the greatest return in relation to risk for a given position holding

time (in days).

The maximum value of the MAE/MAE curve (see the figure below) corresponds to the

duration of holding an open position for 66 days.

MAE/MFE curve for the "The price has broken its maximum/minimum value for the last month" signal

for the SPY instrument. If the ratio MFE/MAE > 1, then the entry point has an advantage and gives a

better chance to enter a trade with less risk.

3. 2. Probability of a positive signal outcome for SPY

We found all the same signals in the period from 2000-02-04 to 2021-05-20 (there

were 1111 of them) and calculated the probability of positive outcomes after 66 day(s)

and other characteristics in case of following such signals.

ὐ Total number of signals: 1111

Ἳ Probability of positive outcomes: 69.04%

Ὄ Signal average profit: 5.573%

Ὅ Signal average loss: -5.636%

ἴ Signal average return (expectancy): 2.102%

3.3. What happened to the SPY price after generating the same

signals in the past?

We generated 10 of the same signals in the past and tried to simulate what happened

to the price for the next day, the next 2 days, 3 days, 1 week, 2 weeks, 1 month and 3

months (price change as a percentage of the price value at which the signals were

generated). From the table below, you can see that 10 signals were generated during

the period from 2021-04-09 to 2021-05-07. Green blocks mean that the price has

increased over a certain period. Red blocks mean that the price has decreased over a

certain period. The percentage of price change is indicated inside the cell.
 What happened to the SPY price after generating the same 10 signals in the past between 2021-04-09

and 2021-05-07?

We also generated 10 trajectories with a duration of 66 days of SPY price movement

after each of the 10 signals was generated (see the picture below). The red line is the

average for all such trajectories and describes how the SPY price has changed on

average after generating the same signals in the past.

10 trajectories of the SPY price movement within 66 days and their average (red line) after generating

10 of the same signals in the past

3.4. Optimal stop loss and take pro ½t for the signal

We tested the SPY for the period from 2000-02-04 to 2021-05-20 to find the best
combination of stop loss and take profit levels for the “The price has broken its

maximum/minimum value for the last month” signal.

We used 2 models for setting a stop loss: by the size of the candlestick pattern,

relative to which the signal is generated, and by ATR (Average True Range). The stop

loss level is additionally varied by multiplying its size by a coefficient from the

interval from 0.5 to 3.5. The take profit level is calculated relative to the size of the

stop loss and additionally varies by multiplying the size of the stop loss by a

coefficient from the interval from 0.5 to 5.

The criterion for the optimal combination of stop loss and take profit was

maximization of the average return on the signal for the period from 2000-02-04 to

2021-05-20.

For the model of setting a stop loss relative to the size of the signal candlestick

pattern, we got the following result:

"Stop Loss and Take ProÛt Test" for the "The price has broken its maximum/minimum value for the last

month" signal for the SPY instrument using candlestick model size. The size of the optimal distance for

placing a protective stop order and take proÛt from the signal generation point is determined by the

maximum value (average return if the signal is executed) inside the table cell.

For the model of setting a stop loss relative to the ATR value at the signal generation

point, we got the following result:

 "Stop Loss and Take ProÛt Test" for the "The price has broken its maximum/minimum value for the last

month" signal for the SPY instrument using ATR. The size of the optimal distance for placing a

protective stop order and take proÛt from the signal generation point is determined by the maximum

value (average return if the signal is executed) inside the table cell.

The tests showed that we will get the following optimal parameters

✴ The best stop volume model: model size

ἴ Average signal return: 1.482%

⛔ Optimal stop loss ratio: 3.5

✅ Optimal take profit ratio: 2.0

3.5. Same Stop and Take Pro ½t Test

See "Same Stop and Take Profit Test" definition here: Same Stop and Take Profit Test

For the generated signal, we additionally carried out the "Same Stop and Take Profit

Test". We have modeled the percentage of profitable trades when placing a protective

stop order and take profit at the same distance from the signal generation point. For

testing, we used 2 types of stop order distance from the signal generation point,

multiplied by a factor from 0.5 to 3.5 with a step of 0.5: a distance equal to the size of

the candlestick pattern and a distance equal to the ATR for the SPY instrument at the

moment of signal generation.

"Same Stop and Take ProÛt Test" for the "The price has broken its maximum/minimum value for the last

month" signal for the SPY instrument. The percentage of positive signal outcomes is indicated inside

the cells of the table.