Stock Odds and Wagering.. the "big" question we all face! As I investigated this more it became more complex. Consecutive day runs are not evenly distributed, and they also vary in a rising market versus a declining market. Some of the following may give an edge to a trader. I've included a visit to the horse track as sometimes it seems we're betting on fast starts, the condition of the track and staying power. Enjoy, Jim
First some interesting extracts:
"I'd like to point out what might seem paradoxical but is important to understand the nature of streaks. Short streaks are more common, but longer streaks make up much of the market record. Streaks of more than 2 days in either direction represent only 29% of the total streaks. However, these streaks, lasting 3 or more days represent 57% of the market days. Which is more important depends on the question you are asking. If a new streak was just about to begin, you'd be right to bet that it wouldn't last more than two days (71% of all streaks). However, if I were to pick a day at random, more likely than not, it would be part of a streak that lasted three or more days. If you were to look at the market action, you would find much of it includes streaks lasting at least three days.
This pattern is still true even if we only look at streaks lasting four or more days. These longer streaks represent only 16% (one in six) of all streaks. However, the encompass 39% of the market days. This is essentially similar to the observation that while millionaires are relatively rare among the population, they nevertheless own most of the country's wealth." A table of this study is included mutualfundvision.com
Second: "If you are in a positive streak, the expectancy of staying with the streak is positive through 10 days,
two weeks of market action. In fact interestingly enough, the expectancy for the next day is fairly
constant following 1-7 days of consecutive upward moves. The average change for the next day was
roughly 0.3%. Note that this is lower than the 1.0-1.4% change I talked about in earlier posts as this
expectancy includes next days that go up and down.
For negative streaks of 1-3 days, the expectancy is that you will lose between 0.17% and 0.28% per
day. The expectancy for the next day reverses to positive for streaks of 4-6 days, though the sixth
day is very small and below the average for the entire period. The interpretation would be that
following three down days in a row, you can expect on average to reverse. This reversal on average
isn't as strong as the days in a positive streak but it is interesting. Beyond six losing days in a row the
numbers get so small that I would be cautious about drawing any conclusions." mutualfundvision.com
Third: Random Walk or Intelligence.. "When events are independent, such as horse races, coin flips and roulette spins, there’s no memory of past outcomes. The probability has not changed as a result of the previous outcome."
Does the previous outcome influence tomorrow? A question we all must ask when trading. Certainly studies of next day odds are helpful, if only to keep one from becoming complacent. In contrast to stocks I found horse betting and casino odds studies helpful as well.
This page was most interesting to me when combined with the stock study: thetrac.com
Last quote which is worth putting on the top of a trade ticket.. "Please don’t fall into the trap of believing that a reversal of trend is imminent. If you’ve just lost the last six races in a row, don’t think that your chances of winning the next race are any greater, because they aren’t." |
