Hour Compositions Pt 2: Strength over time

I pulled up the statistic that I had done a while ago about the effect of the current bars movement on the net major move of the day. As it stood in that version, a movement of 25 pips in a single direction gave about a 60% edge to the major move of the day being in that direction.

Given my recent interest momentum, toying with the idea of SB work and using small frames as my data, I wanted to research this idea a bit more thoroughly. If you measure the distance from a certain close to the current open, how likely are you to be able to predict the close of the higher frame relative to the open? That is, if I’m looking to determine the close of the hour relative to the open (is C-O > 0 or is C-O < 0 ?), is there a point where I can know for sure if the answer is one way or the other? Initially my thought process was that if I know where the 58th bar closes relative to the open of the 1st, I can probably know that the close of the 59th bar relative to the open of the 1st bar will be the same. Let’s run the data:

1

Most interesting to me was the strength that one gets from even a single bars close. By the time you wait 8 or 10 bars, or 1/6th of the way through, you have what is in my opinion seemingly substantial evidence for momentum. I also took a look at the few cases where even knowing the second to last bar cannot tell you where the next bar will close. These are not cases where the last bar makes some crazy move, rather those bars tend to sit around the open price to begin with, letting just a few pips in either direction make the difference.

This made me think: If a bar goes from 0 to +5, it makes sense that it would be likely to finish somewhere in the positive region; after all it is now “cheating” by having a +5 buffer. Okay. What if I tested this dynamic looking at cases where price moves to +5, then back down to 0 or in the negative space? At this point, is price still likely to finish in the positive space?

2

Not quite. At this point, the edge becomes more like a traditional coin flip. It is good to know that the stats are pretty consistent across the board, even with the relatively small sample size (2 months). On the second test, the probability actually does decrease over time, from 50% likely down to 46% likely. This is perhaps suggesting that when price waits a long time before breaking a price line, it’s a signal of reversal. However, 46-47 is not strong enough to say that this is a reliable signal

While expected (since we know how good the market is at being 50-50 with these things), it’s actually not a bad thing to know in the end. The stats are in some way confirming support and resistance. As long as price stays above the open price, price is likely to end above that price. So if one gets the chance to get in on price when it is on a pullback then at best, there’s generally a 10%+ edge to be had. At worst, it’s a coin flip. Therefore, as long as one is trading with at least a 1:1 ratio, the coin flip losses are perfectly fine, and the edges shine.

 

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