July 4

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When To Go Short: S&P Intraday Price Study

By Jeff Swanson

July 4, 2022

automated trading, Automated Trading Development, EasyLanguage, ES, futures trading, Market Edge, market studies, mean reversion, S&P Emini, Trend Following

There are many opportunities to find a trading edge with intraday systems, and we will explore the very first step you should take.

This article will be an extension of a previous article where we performed an intraday price study. We do this by exploring different market sessions to determine if we can find an edge for a possible intraday trading system. If you have not read the previous article, When To Go Long, I urge you to read this because we will jump in and explore the same concept on the short side.

As a reminder, here are the five market sessions we will be looking at.

Five Market Sessions

  1. Pre-Market, 06:30 to 08:30
  2. The Open, 08:30 to 10:30
  3. Midday, 10:30 to 12:30
  4. The Close, 12:30 to 15:00
  5. Post-Market, 15:00 to 19:00

We will use the same trading principles used in the previous article. The only difference is we will be shorting the market instead of going long.

I will use a 10-period RSI for the mean reversion entry rule and enter a short position when the value is above 75.

If ( RSI( Close, 10 ) > 75 ) Then
   
Sellshort("SE Mean") next bar at market;

For the trend following the entry rule, I will use the 10-period momentum calculation and open a short position if the momentum is below zero.

If Momentum( Close, 10 ) < 0 Then 
   Sellshort("SE Momentum") next bar at market;

I will also use a simple 200-period moving average applied to the daily chart to act as a regime filter. A single trade is entered, and the position is closed at the end of the market session as defined above.

We are allowing only one trade per day. Slippage and commissions are not deducted, and no stops are used. I'll be testing using 15-minute data from 2000 - 2021. 

Trend Following Testing

BEAR MARKET: We're going to open a trend following trade when the momentum is below zero and when price is in a bear market. (daily price trading below the 200-day SMA).

Winner: Post-Market

Session

Avg NP / Trade ($)

TF Bear: Mid Day

12.26

TF Bear: Post-Market

17.42

TF Bear: Pre-Market

2.05

TF Bear: The Close

5.73

TF Bear: The Open

-15.38

BULL MARKET: I will reverse the regime filter, so we will take trades during a bull market. That is, we will be opening new trades when the price is trading above the 200-day simple moving average. I would not expect this to show great results. Shorting the stock index market during a bull market is very difficult.

Winner: Pre-Market is the clear winner. However, it's a meager value, and notice all the other sessions are negative. Shoring during a bull market is difficult!

Session

Avg NP / Trade ($)

TF Bull: Pre-Market

6.51

TF Bull: The Open

-2.55

TF Bull: Mid Day

-6.54

TF Bull: The Close

-12.13

TF Bull: Post-Market

-8.16

Testing Mean Reversion Characteristic

BEAR MARKET: Now, I will test our mean-reversion trading system rules over the five different periods. Trades are only opened during a bear market. 

Winner: Post-Market. The Pre-Market is the clear winner. Notice that most other sessions are positive, but only The Open is in the double digits.

Session

Avg NP / Trade ($)

MR Bear: Pre-Market

4.12

MR Bear:The Open

34.27

MR Bear: Mid Day

3.27

MR Bear: The Close

-37.13

MR Bear: Post-Market

65.69

BULL MARKET: Let’s now look at our mean-reversion trading strategy during a bull market. 

Winner: Pre-Market. Again, we can see shorting in a bull market is difficult.

Session

Avg NP / Trade ($)

MR Bull: Pre-Market

21.54

MR Bull: The Open

-8.10

MR Bull: Mid Day

-25.52

MR Bull: The Close

-19.15

MR Bull: Post-Market

3.08

Conclusions

I took all the results from above and put them into a single table, below. Now you can sort by Average Net Profit Per Trade by toggling the "triangle" on the column header. 

Session

Avg NP / Trade ($)

MR Bull: Pre-Market

21.54

MR Bull: The Open

-8.10

MR Bull: Mid Day

-25.52

MR Bull: The Close

-19.15

MR Bull: Post-Market

3.08

MR Bear: Pre-Market

4.12

MR Bear: The Open

34.27

MR Bear: Mid Day

3.27

MR Bear: The Close

-37.13

MR Bear: Post-Market

65.69

TF Bull: Pre-Market

6.51

TF Bull: The Open

-2.55

TF Bull: Mid Day

-6.54

TF Bull: The Close

-12.13

TF Bull: Post-Market

-8.16

TF Bear: Pre-Market

2.05

TF Bear: The Open

-15.38

TF Bear: Mid Day

12.26

TF Bear: The Close

5.73

TF Bear: Post Market

17.42

By sorting the average net profit per trade from highest to lowest, we can see what bubbles up to the top. We can presume that these are the best opportunities for building an intraday short only trading system.

The best performing sessions are.

  1. Mean Reversion: Bear: Post-Market
  2. Mean Reversion Bear: The Open
  3. Mean Reversion Bull: Pre-Market

Mean Reversion is the better strategy as all the top-performing strategies are mean reversion. Furthermore, shorting in a bear market takes the top two positions. The third position is interesting. It's shoring during a bull market.

Notice that shorting the Pre-Market during both a bull and bear market appears to hold an edge. Interesting.

Mean Reversion: Bear Market: Post-Market

Backtested Results: Here we can see the vast bulk of the profit happened on a handful of trades in 2022. So, I would not put too much value into trading this session. It looks like a few excellent trades biased the results. Of course, this good fortune may continue forward into 2022 and beyond.

Mean Reversion: Bear Market: The Open

Backtested Results: In this session we can see we have a climbing equity curve. This tells me we might have an an edge for a mean revering strategy during this session.

.

Mean Reversion: Bull Market: Pre-Market

Backtested Results: This is the best looking equity curve out of the three. This looks like the strongest session where a mean reversion strategy might be developed. Ironically, it's shorting during a bull market!

Conclusions

Remember, the strategies presented in this article are not viable trading systems as they currently stand. The strategies in this article are market studies! You can’t expect these simple trading strategies to produce results with real money.

These are nothing more than indicators to point us in the right direction. However, this article and the previous article demonstrate a way to analyze the market in an attempt to find an edge.

Can an intraday trading system be developed from the information presented in this article? Maybe. It will depend upon many factors. The point here is that this gives us a way to narrow our focus to a place to start.

Good luck, and let us all know, in the comments below, if you found this helpful or if you had success with building a trading system. 

Jeff Swanson

About the author

Jeff has built and traded automated trading systems for the futures markets since 2008. He is the creator of the online courses System Development Master Class and Alpha Compass. Jeff is also the founder of EasyLanguage Mastery - a website and mission to empower the EasyLanguage trader with the proper knowledge and tools to become a profitable trader.

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