Tomorrow's Pricing

Discussion in 'Trading' started by Dave at NextDay, Apr 29, 2010.

  1. Since, when I first joined ET about a week ago, I was posting in the Journal thread of the Trading for a Living forum, I had already given my background and purpose for posting with ET. For those who have not read those threads, I'll give a quick explanation. I've been a professional trader for over 30 years and am winding down, not that I'll ever quit. Over the years I've developed a couple algorithms that I've used which have been helpful in reducing my risk at entry, both in time and price exposure, which in the end significantly improved my profit ratios.

    The basic premise is that valuation, rather than price, is a more stable number on which to evaluate entries and/or exits. Consequently, I started running valuation calcs on the each stock within portfolios which we were managing. I'd take the results and shove them back into the portfolio and apply the appropriate weighting and get a resultant number.

    Since that worked, I began modifying the formula to see if I could refine it to the extent that I could project just one day ahead for one stock. To my surprise it worked, so all I've done is apply the law of large numbers and have been running it ever since for the indexes. Since then, I've applied to sectors in ETFs, the FX market, etc. and it's close enough. When I jumped to the futures business in the early 80's I decided to begin running those calcs on the components of the indexes, principally the S&P in order to refine my entries. The calc runs the most probable maximum and minimum price, then I run a simple Monte Carlo to get the most probable price level for an average day. Finally, volatilities of each component are considered and factored into the final results.

    Consequently, each day has 3 most probable price levels to the upside and 3 to the downside. These are NOT price S/R levels nor are the pivot points. Each price level is a high probability level to which the market should reach during the upcoming trading day. The final factor is the internal strength of the market at the opening. I start assessing that about an hour prior to opening, and then make final adjustments early in the opening range. Depending on the markets strength, typically half of the price targets are eliminated. A final reason I like to run them the night before is that oftentimes in the overnight market, the futures contract will hit one of the price levels which end up not being relevant that next upcoming day. Obviously, you always have to adjust for the current difference between the cash to futures pricing.

    I've attached a pic of the cash S&P with tomorrow's price levels. I left all six of today's price levelson the pic and put in bold the ones that were relevant for the day. Normally, I just keep the most relevant and eliminate the others just after the opening.

    Today was pretty true to form. One thing I did notice when I ran my numbers tonight, is that I made a few input errors yesterday. It didn't make much difference, but it's been a busy couple of weeks and I got a little sloppy; shouldn't ever happen again.

    Good luck and good trading.
  2. joe4422


    After 30 years of successful trading, and lots of money, I'd probably make a website too. Fuck relaxing on the beach, and just trading a couple of hours a day.
  3. joe4422


    I've got something even better than your alog, they're called pivots and are free with every charting package in the world, and everyone in the world knows about them and uses them.

    I've posted a chart of the miracles these numbers performed yesterday, and the lines for tomorrow. This also shows the premarket so you'll have to figure out market hour times by looking at the volume. This is a 30 minute chart of the ES.
  4. Thanks for the tip. It's a tough life loving what you do.