Open Question- An Advantage to Open/Close Trading?

In light of the high-frequency-trading robots, learning algorithms, and other various and sundry computer generated impediments, is there now an advantage to trading the open and/or the close?

Yes, at the open and the close the order imbalance on both sides of the trade can be traded against, and especially at the open there may not be enough liquidity to prevent a few orders from pushing the price up or down.

For institutional investors who have to fill large orders, this is not an option. But for the retail trader, maybe so.

My assumption is that the orders are able to be filled at the open/close without the robots affecting the fills. Perhaps this is erroneous.

What say you?

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Those folks who jumped on PDS extended trial offer were immediately rewarded with an 8% gain in the only pick for the day.

When the market is able to pullback a little more, we’ll be getting many more dips to buy.

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The absolutely free trial has been extended to allow 3 days of access to PDS. Only a valid email address is required.

You can try PDS trial here.

The trial provides full access to the entire PDS site and includes

• Any new buys, as well as their exit thresholds (both updated every evening at 9:45 Eastern time)
• The entire database of opened and closed trades (over 800)
• The Open Positions email (Arrives at 3:30 p.m. and alerts you to any positions that may meet the exit criteria)
• The Daily Dip email (Arrives at 9:45 p.m. and lists all closed trades as well the buys for the next open)
• All of the position-sizing models
• The forum
• The blog
• FAQs

If you have any questions, feel free to leave a comment, use the forum, or send me an email: woodshedder73 at gmail.

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Here is a screen shot of part of PDS closed trades page.

Despite the numerous calls over the past few weeks for the market to fall, PDS has remained almost 100% long. Keep in mind that these are ALL the closed trades, so it includes both winners and losers. Yes, the 70.42% win rate after 818 trades is impressive. Feel free to leave a comment with any questions or send me an email: woodshedder73 at gmail.

As always, the trial is free and requires only a valid email address. There were no new picks for Tuesday, so if you want to try the trial and get some fresh picks, you’ll have to wait for the market to pull back a little more.

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The first post demonstrated that throughout 2010 there has been a significant edge to being long overnight.

I mentioned that figuring out what is going on can be a tad complex. Maybe the overnight market is mean-reverting? Perhaps it is following through on the daytime market? Perhaps it is neither or both?

The following graph shows the results of adding a variable before getting long for the overnight. For example, if the close was greater than the open (C > O), then SPY was bought at the close to hold overnight. For each variable, a provision was made to buy for the overnight even if the two conditions were equal (C=O). In hindsight, I wish I wouldn’t have run the tests with that provision, but it did not make that much difference.

Summary of the Results:

Over all SPY history, profitable overnight trades are primarily due to the market mean-reverting during the overnight. Even the O < (C,-1) variable, which tests if the overnight market mean-reverts relative to the previous overnight market, show mean-reversion.

However, in 2010, we do see some evidence of overnight profits being the result of market follow through. I have mentioned, as have others, that mean-reversion has been taking a bit of a break lately, and these results reflect that. I do expect that mean-reversion will in the near future again be responsible for the bulk of the overnight returns.

What Does This Mean for PDS?

Well, it now makes perfect sense to me why PDS performs better when selling at the close rather than the open. As PDS sells positions into strength, the market is typically trading higher than the open, and higher than the previous close when the majority of exit signals are given. Given the above research, we would expect the market to mean-revert overnight, which means the likelihood of a lower open, and therefore the likelihood of a lower exit price, relative to the previous close.

Chart Porn:

Here is the equity curve and profit table generated from trading the overnight market after the conditions of the best performing variable are met, C < (C,-1)

Imagine using margin to buy the SPY at every close, and selling it at every open, when the conditions are optimum for the setup. With .005/share for commissions, one would still have been able to add approximately 4% a year to his total return. Not bad!

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On the face of it, this is a simple issue. Is it better to be long overnight or long during the day? However, once we drill down into it, we find the issue to be much more complex.

For now, we’ll look at the simple part of it.

In 2010, has it been better to be long during the day, from open to close, or has it been better to buy at the close to be long overnight, and sell the next open? No commissions or slippage were included in the tests.

Results of Being Long During the Day:

SPY Net % Gain = 1.52%; Avg. Trade = 0.01%; Win % = 55.98

QQQQ Net % Gain = 1.23%; Avg. Trade = 0.01%; Win % = 53.80

IWM Net % Gain = 0.43%; Avg. Trade = 0.01%; Win % = 51.09

SPY Equity Curve:

Results of Being Long Overnight:

SPY Net % Gain = 7.16%; Avg. Trade = 0.08%; Win % = 55.43

QQQQ Net % Gain = 7.94%; Avg. Trade = 0.09%; Win % = 56.52

IWM Net % Gain = 8.93%; Avg. Trade = 0.10%; Win % = 57.71

SPY Equity Curve:

With the SPY up 2.18% YTD, we can see that there has been a significant edge to being long overnight.

I find myself wondering, “What are the implications of this edge?” particularly so because PDS has consistently performed better selling at the close rather than waiting for the next open, which is counter to the results demonstrated by these tests.

And that is where the issue gets more complex. How do we use this edge when trading individual stocks? Do we create lists of stocks that are highly correlated to the indices and use this research as a guide to buying and selling? What type of environment would merit being long in the daytime, and when would we want to switch to being long overnight?

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I’ve been a bit out of touch lately, eating copious amounts of fresh, local seafood, knee-boarding, surfing, and playing super Dad.

I have been keeping one eye on the markets though, and I can say that this pullback is the healthy pullback I’ve been looking for.

Not so long ago, I put up a post with resistance, and you can see from the chart below that the resistance was broken, and now we have pulled back to rest right at resistance (now support).

And this is where it gets critical. We do not want a false breakout, which many traders consider to carry more weight than the breakout itself. The SPY should hold above $113ish if this rally is to continue.

Worst case scenario for the bulls, we continue breaking beneath the area of consolidation at $112.50, and again trade beneath the 200 day moving average.

It would not surprise me at all to see this happen, considering that so many traders were watching the former resistance level to be broken.

However, I will follow the path of least resistance, and that seems to be upward. Therefore, I am expecting support at this level and not a breakdown.

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