26 December 2010

Predicting Large Movements

I did some tests to find out what trading pattern precedes large moves, both up and down. So I checked for trading action of previous 5 days for all corrections and rallies over 5%. Let me call them "Big Days". Got some interesting results the summary of which I am pasting below in the table.

First check the bottom table, which says that since July 1990, the average "total" movement of 5 days is over 6% and average "actual" movement is about 0.4%. "Total" here is defined as absolute movement, to capture up and down magnitude both. "Actual" is just the simple net movement for each 5 day block.

Now check the above 2 tables. The top one is for rallies over 5% and bottom for corrections over 5%. What is interesting to see is for both criteria we get an average total of over 12% and average actual of just under -2%! Also could be seen that before such a big movement volatility tends to be double as compared to an average day.

Amazing find is though the actual movement is generally around 0.4%, big moves on both sides come when we are net down (around 2% on an average) in the past 5 trading sessions! So its a tricky situation when market is very volatile and significantly down, as either the downtrend can accelerate or there can be a strong rebound!

The average total movement is another quite interesting find, as it shows that once the volatility is high, (you get big movements same or both sides) there is higher chance that the volatility may carry on for some more time. So I am sure if we plot these big moves in a timeline we should see them in clusters.

There are 60 odd times when we have got 5% or more movement on up and down side in 4900 days. We can say roughly in 80 trading days (3.5-4 months) we should expect one 5% up and one 5% down move day, but as these days tend to be clustered, there should be expectations of more when one occurs. It would be great to track these developments real time, lets wait for our "Big Days".


Post a Comment