Short-Term Trading1

Short-Term Trading1 - Fundamentals of Short-Term Trading:...

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Fundamentals of Short-Term Trading: Part One Brett N. Steenbarger, Ph.D. www.brettsteenbarger.com Note: This was written 1/25/04 as the first in a series of articles that describe my evolving approach to short-term trading. I strongly recommend reading the article on stationarity, which is archived on the site, before reading this series of articles. In this article, I will describe patterns of price behavior on an intraday basis and their implications for trading. I believe that an adequate consideration of how price changes actually occur during the day will challenge traditional methods of trading and open the door to new ways of viewing and analyzing the markets. The Challenge of Stationarity I’d like to begin this article with a set of descriptive data on the ES market, the main market that I trade. For purposes of convenience, I looked at the market between October 9 th , 2003 and January 16 th , 2004, which gave me 68 full days of data. I broke down each trading morning (9:30 ET – 12:00 ET) into half-hour segments to see how each segment compares to the ones around it. Below is a table of the average range and standard deviation (in ES points) for each 30 minute period in the morning. TIME RANGE ST. DEVIATION 9:30 – 10:00 ET 4.06 1.451 10:00 – 10:30 ET 3.765 1.452 10:30 – 11:00 ET 2.9 0.991 11:00 – 11:30 ET 2.458 0.806 11:30 – 12:00 ET 2.597 1.333 Now let’s look at the average number of trades placed per minute during each half-hour period from 10/9/03 to 1/16/04: TIME TRADES ST. DEVIATION 9:30 – 10:00 ET 187.88 98.91 10:00 – 10:30 ET 183.78 121.26 10:30 – 11:00 ET 133.20 91.97 11:00 – 11:30 ET 101.04 77.90 11:30 – 12:00 ET 84.60 84.24 Here’s the average volume of trading in contracts per minute during each 30 minute morning period:
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TIME VOLUME ST. DEVIATION 9:30 – 10:00 ET 2331 1470 10:00 – 10:30 ET 2133 1679 10:30 – 11:00 ET 1533 1310 11:00 – 11:30 ET 1121 1046 11:30 – 12:00 ET 932 1091 Finally, let’s look at the average one minute level of the NYSE Composite TICK over each half-hour period in the morning from 10/9/03 through 1/16/04: TIME NYSE TICK ST. DEVIATION 9:30 – 10:00 ET 300 378 10:00 – 10:30 ET 240 390 10:30 – 11:00 ET 212 311 11:00 – 11:30 ET 243 289 11:30 – 12:00 ET 295 272 What do these numbers tell us? Most traders are aware that there is more volatility and volume in morning trading versus the early afternoon, and more volume and volatility late in the day than in the middle. These half-hour figures, however, drawn solely from early day trading, suggest that even the morning hours are not uniform. Volume and volatility is highest in the first half hour and tends to wane through the morning, with particularly notable drops from 10:30 ET on. This suggests that even the very short-term trader is going to run into problems of
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This note was uploaded on 10/21/2010 for the course BUSINESS 19450 taught by Professor Goldberg during the Fall '10 term at Saddleback.

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Short-Term Trading1 - Fundamentals of Short-Term Trading:...

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