Damn Mav, Seriously, have you ever considered a side career in teaching, (like you're not already busy)? I used to teach high school, and let me tell you, if we had more folks in the profession who knew how to explain complex concepts in metaphor like you just did, the world would be a more informed place!
Still talking about SPY: Actually the small move is skewed pretty heavily towards zero which is a good thing from a trading perspective. That means movement from the open >.16 ends up being a big move a lot more than I would think from my chart watching and trading over the years. The big move is more evenly distributed around the average. I'm not too sure how I feel about fading A levels. From the number crunching I've been doing I've found a strong statistical edge in following momentum from the .16 breakout and trading in that direction until it reaches the big move distribution area. The fade strategy is not so clear. Price does tend to stop moving 90% + of the time after a certain distance but it doesn't really have much consistant behavior after that. By that I mean just because it stops moving most of the time doesn't mean it goes back towards the open most of the time. If anything it seems to randomly chop around up and down for the most part. That would make it hard to know when to get out at a loss because adverse movement would technically increase the odds of the move ending, and I guess that is how people get in trouble when they hit the big trend days. I think at some point I'm going to examine the big trend days as a group and see if the 2+std area flips from resistance to support once price moves through it on the big trend days. I would also like to run some tests on the opening range vs movement that day. I just haven't wanted to bother manipulating intraday data just yet. Maybe I will get staff duty soon lol.
From what I've found so far I have noticed that MF's published A levels tend to be at the point where most big moves end. Maybe the idea is that if price moves strongly past this area you catch all the big mean reversion players on the wrong side of the market and ride on them being stopped out. I would like to point out that using any specific level, including A levels, is not very meaningful. There is no set price where things change, rather it is a range. I think understanding what these levels mean to different types of traders and being able to read the tape or price action in these areas is key.
Here is the most recent day where price did not behave as expected. (the 27th) After the AM down move odds are very high that it will be the biggest move of the day. The 4 lines from top to bottom contain 50%, 70%, 80%, and 90% of smaller moves. So we would expect the move up to fail somewhere in there on an average day. I personally see move value in trading failed reversions rather than playing the reversion itself but I guess it really depends on the price action.
Skewed toward zero... What does Zero represent? Do you have a table that shows the distribution of moves over an extended period of time. I just want to see how often the moves happen. Also some of the largest range days are sometimes the most range bound and volatile days. Also Are you looking at High-low for the range or open-to close? With the fading there are only certain instances where once can do it. By looking at the VWAP and volume distribution you make a judgement as to which moves are more likely to revert and those that are not. For example, in a skewed distribuition (VWAP>PVP) there is not likely to be any meaningful reversion as the price is likely to continue being skewed in one direction and the odds are not the same for reversion to occur in a skewed environment. However, when you have a relatively non-skewed environement...the odds are that price will more likely revert as it gets pushed out to the outer std deviations. You can't backtest this, but if you understand simple probability and stats you can deduce these things. The A-levels simply provide very accurate areas and a way to limit your risk!
Take a look at these A-levels for that same day...Arbitrary or not? Fading the first failed A-down into strength was a way to enter into the trend on higher a timeframe. That would have provide a much better R:R way of playing the trend! Into the A-up there is no fade as price makes an a-up. I traded this day and we indeed had a skewed environment with most volume done in the lower price range of the day and VWAP above it.
When I say skewed towards zero I mean $0.00 from the open. Ie 50% of small moves fall between 0 and .16. Range is low to high. I'll post the distributions when I'm on the computer later. On the smart phone. BTW would you guys prefer if I post this stuff in a different thread so as not to clutter this excellent thread and leave it for pure acd?
The real question is should you be doing any ACD testing on the SPY ? Best t ochoose instrument that you "may" think is a good ACD trading vehicle.... SYP not too sure.... but you tell me! I like what you are posting thought- thanks!
I actually have. LOL. Actually, for 7 years I have been teaching options and trading to the public here in Chicago for FREE. I get a lot of the angry Optionetics students who never learned anything about options and teach them how to really make money with options. The group has kind of transformed itself now into more of a broad based trading group and has slimmed down over the years. Use to be standing room only! But I do enjoy taking complicated ideas and helping people understand them in a way that makes sense to them. I did that in my prop office for years. But I do get people coming up to me all the time and tell me how much better they understand things after listening to me. I don't have any real desire to make money off of it. The truth is, the reason I did the public speaking bit is because I use to have a fear of public speaking. So to conquer it, I got up every month in a room in front of 20 to 40 people and talked trading. It worked! I just get so frustrated with the lack of quality trading content out there. All these seminars come into town and sell their crap and never actually explain the art of trading. But people tell me I should write a book or teach a class. I even had someone offer to take all my posts off ET and turn them into a book. Just the trading content. LOL. Might be an interesting idea for a book no?