3 Consecutive Down Days on SPY

What is the 3 consecutive down days pattern? Just as the name describes, it’s simply a pattern in which we have 3 down days in a row. Each day, the close is lower than the previous day’s close. In other words, the trend for the last 3 days is down, and the sellers are probably in control for the short term. Below is an example of this pattern.

This pattern occurs somewhat frequently, and in all markets. Nevertheless, different markets have different tendencies. For markets that are more mean reverse, seeing this pattern could mean a buying opportunity. For markets that are more momentum driven, this could be a short selling opportunity.

It is a well-known fact that indexes are highly mean reversion market, especially the S&P 500 since it’s the most diversified index. As a result, after the S&P 500 makes a big move in one direction, it usually means reverse back to the average briefly. In addition, indexes have a strong tendency to go up over the long run, which can definitely help us with creating a strategy that only trade on the long side.

To find out if there is any edge to the 3 Consecutive Down Days pattern, I did a quantitative test to see what happened if I bought the close after 3 consecutive down days, then sell in X days after. The data is for ticker SPY from 1/1/2000 to 6/21/2022. Here are the results:

Notice that our exit signal is only for 3, 5, 10, 15, 20 days after which should give us enough varieties, and avoid overfitting. From this table, we can see that the win rate is around 60%, the average return is from 0.32% to 0.69%, and the median return is from 0.51% to 1.62%. All exits provided positive results. We can also see that the longer we hold, the returns seem to be better.

Now, let’s see what an equity curve for trading a strategy like this looks like.

For a simple exit, this equity curve is not bad! Of course, it’s not beating the buy and hold method. However, keep in mind that the draw down is a lot less and the percent of time in the market is also significant lower.

It’s clear that there is an edge for buying SPY after 3 consecutive down days. With a better exit & perhaps a profit target (hint), this strategy can be improved much further. However, that is beyond the scope of this blog. My goal is only to share ideas that have an edge, you will have to do your own research to improve upon these ideas.

Disclaimer: I am not a financial advisor. All information in this blog is for educational purposes only. 

Average True Range – The Secrets That Professional Day Traders Don’t Want You to Know.

Average true range (ATR) is a volatility indicator originally developed by J. Welles Wilder. The indicator describes the degree of price volatility. The higher the ATR, the more volatile a stock is.

We often hear traders talk about ATR, but how do we use it? Well, today I will share with you how I use ATR for day trading.

Below is a study I did on SPY with a 10-days ATR. You can use a 14-period or 20-period ATR, it won’t make a big difference. The data is on SPY from January 2000 to February 2022. In this study, I used the previous day’s ATR to compare it against the intraday range. This is because going into the day, we only know the previous day’s ATR. Here is the breakdown of the % of days when the intraday range is less than or equal the daily’s 10 period ATR.

As you can see from the figure above, 66% of the days have a range that is less than 1 ATR. Nearly 82% of the days have a range that is within 1.2 ATR! At 1.4 ATR, that captures more than 90% of the days!! In other words, daily ATR can be a very helpful tool for us to determine the high/low of the day.

So, how do we use daily ATR for day trading? For example, if you see that the S&P 500 has been selling off all morning. It is trading at the low of the day and its intraday range is currently 1.2 ATR at 12 PM. Knowing that nearly 82% of the days have a range of less than 1.2 ATR, and only 18% of days have a range of more than 1.2 ATR; It’s probably a good spot to be thinking about buying. There is still a lot of time left for the day, so more often than not there might be at least some kind of pullbacks from the S&P 500.

To summarize, ATR can be a very effective indicator to use for day trading. By itself, it is not nearly enough to take a trade. However, if you combine ATR with technical analysis and other edges, it can boost your results tremendously.

Disclaimer: I am not a financial advisor. All information in this blog is for educational purposes only.