So, I have done a study on the predictive power of some chart patterns and the DeMark indicator. I have also done a study on 1 hour bull flags on TSLA (yet to be published but I can tell you now, they don’t work on the 1 hour chart :P, leave a comment if you want me to actually publish the results to this). So I figured, I should test my own indicator that I created, the Z-Score indicator with buy and sell signals, using the 5 minute chart on SPY. Its only fair since I test these other things. I have done this same study on TSLA as well using the 1 hour chart. I may just group the bull flag and z-score study together on TSLA. But I wanted to share SPY first.
These are just the ways I use to pass time while I am waiting on my positions. This and playing shooter games and Tetris. Sometimes doing homework, but really who has time for that. #daytraderlife lol
About Z-Score Indicator:
Refer to my indicator’s post to see how and why it works (I will link below), but essentially, z-score is a statistics based measure about how far a value is from its mean. In the case of this indicator, it tells you how far SPY or any other stock has travelled from its mean over the pre-defined period of time. The further away from 1 or -1 a stock trades above its mean = the more stress is on the stock and the more likely we are to see a reversion to the mean. Thus, a stock trading at -0.50 from its mean can be said to be trading normally. But a stock trading at -2.52 from its mean will likely need some aggressive pullback to the upside. Inversely, if it was trading at +2.52, it would likely need to aggressive pullback to the downside. (see chart below for a picture representation):
About the Study:
- Conducted on SPY on the 5 minute time frame. - Theoretical entries were placed on the signaled area and exits were drawn in the area most tested above or below the signaled area to simulate real world exits (you are not going to get the full move realistically). (See example below):
- Time period is year to date, starting January till the 21st of April.
Results:
- There were a total of 22 signals, 17 buy (77%) and 5 sells (23%). - The success rate of all signals was 86.4% with a fail rate of 13.6%. - The most likely signal to fail was the buy signal with 3 failures. The sell signal had 0 failures. - These results are statistically significant when analyzed through one-sample binomial test with a p value of 0.001. This means, these results are not likely attributable to chance and indeed significant. - All of the signals were followed through with on the same day, but occasionally there was initial pullback. - Of the successful sell signals, the mean sell off was -2.29 (SD=1.38). - Of the successful buy signals, the mean buy up was 3.55 (SD = 1.83).
Limitations
- The indicator does not give you an entry or exit price - The indicator is not perfect and does produce false signals. - The indicator is not triggered frequently and this is why its likely accurate. It has been programmed to only be triggered at the most high probability trades. Thus, it is not always helpful to detect the smaller moves in the market. - The timeframe of the study is small and the sample size is small. - This was only done on SPY on a 5 minute time frame. Thus, it is not generalizable to other stocks and other time frames.
Conclusion
The Z-Score indicator is a worthy indicator, along with the DeMark indicator, to add to your SPY trading repertoire. It has an accuracy rate of 86.4% YTD on the 5 minute timeframe on SPY. However, neither it nor any other indicator should be solely relied upon for entries and exits. Instead, it should be used to aid you in your analysis of which trades to take.
Side note: My goal is to test as many technicals and, what I would deem, rigorous indicators statistically to come up with actual measurable parameters that people can use to guide their trades. Its a slow process, but once I have conducted enough of these little studies, I will figure out how to combine them all together into an info thing on what works, what doesn't work and the extent to which they work.
Thanks for reading! Feel free to leave your questions/comments and critiques below!
@lavontakeyamon, I am taking this weekend off from SPY lol. And mostly the market in general. Was pursuing BAC as a possible alternative day trade substitute. I like that its fairly cheap and I could trade sizeable positions without having to resort to options. But I will take a look at SPY tomorrow night when futures opens.
stein3d
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Nice! Can't help but notice your Z Score on the 5 minute is telling me to buy. Time to swing long for the relief bounce into next week ;)
Steversteves
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@stein3d, I am, too but only 1 contract and only because both Z Score and RSI are in agreement. BUT, only 1 because there were no bounces really. I mean, there was one at the EOD but yeah, this thing just went straight down since yesterday. That's... weird. And I just don't really know what to expect on Monday. The weird thing is GLD was also struggling today, too. Very weird day in general, but yeah. Lots going on!
stein3d
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@Steversteves, Haha yea, I stuck to 1 as well. Definitely not sure what to expect going into next week, selling volume really ramped up. Some continuation into early next week would not surprise me at all, but some kind of bounce seems inevitable. Maybe... 🤣 Hindsight should have just stayed in my short positions through today.
Steversteves
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@stein3d, Yeah! I mean, today the continuation in selling was expected because SPY did not actually go into the oversold region. And generally, when this happens, SPY will go into oversold on the 1 hour chart. So I knew it was going to continue selling today, no surprise there. I just don't know to what extent we will bounce on Monday. Will need to crunch some numbers over the weekend haha. But, really, its a nightmare and a half. This market really makes me work for my money and maybe its also because I am still sick, but just don't have the energy hahaha.
stein3d
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@Steversteves, The more I look at it, I'm starting to think this may have been a revenge trade for me. I took profit on my short position yesterday before Powell speech because that can be such a wild card and then didn't re-enter after, and left 100s on the table which I've had difficulty getting out of my head. None of my trusted indicators said I should go long yet, almost got a signal when it started to bounce back EOD but that got smacked down so going purely off RSI and how oversold things felt. Past couple days this week are reminding me of Jan 17-21 though....
Steversteves
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@stein3d, Uh oh. We are already hard red into afterhours in our swing positions hahaha. It just doesn't know when to stop!
stein3d
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@Steversteves, Sadly, I'm just going to forget about it until Monday open😅 I turned off post and pre-market on my charts a while ago but it still shows me the price. Could even see a gap down on Monday, but I'm looking for at least 435-438 at some point next week and that will be fine. Unless big tech earnings are a flop and they just decide to rip off the band-aid and send SPY to the depths!