Trading For a Bounce
In this article we are going to look at what a trader might do on the Australian Market following a big overnight fall in the US market.
Generally following a big fall in the overnight markets there is quite a bit of panic as analysts, journalists and the media in general paint a pretty bleak picture of the goings on in the world.
Profitable traders try to put this to one side, or better yet learn to understand market sentiment and rely on factual information.
So the question this week is: What might a trader do following a big drop on Wall Street? In the table below I have put together the returns based on the size of the overnight fall in the S&P 500 for buying the SPI 200 futures contract (a measure of the ASX 200 index) if the market can rally 20% of the previous 7 day average range above the opening price exit on the following day using a trailing stop below the opening price the day after entry.
Column l-1 represents the percentage fall in the S&P 500 futures contract from the previous days closing price while the other statistics show the odds for buying the SPI 200 contract following this overnight fall.
The US market in open during the Australian night and the Australian market open's after the US market closes, so we have this data prior to the open in Australia.
An analysis of the data above shows that on average a trader would have been better to buy into any strength on the Australian market following a down close in the S&P 500 over the past 15 years.
It also appears that the bigger the down move the more profitable it was to buy the SPI 200 contract on any breakouts above the opening price.
A quick glance shows that of the declines of 2.
5% or more have generally led to some pretty good rallies on most occasions, and the upside has outweighed the downside risk considerably.
It is however difficult to buy on these days as sentiment is always very negative.
A lot of people prefer to wait and see what happens, which is totally the wrong thing to do as once you've seen what's going to happen, the opportunity is no longer available! In summary an analysis of the past shows that it has been more profitable for a trader to buy into rallies following a down close on the US futures markets.
The table included with the article has outlined the past profits from buying the ASX 200 futures contract (SPI) using a volatility breakout above the opening price following a specific percentage fall in the US market.
I hope you find it useful.
Generally following a big fall in the overnight markets there is quite a bit of panic as analysts, journalists and the media in general paint a pretty bleak picture of the goings on in the world.
Profitable traders try to put this to one side, or better yet learn to understand market sentiment and rely on factual information.
So the question this week is: What might a trader do following a big drop on Wall Street? In the table below I have put together the returns based on the size of the overnight fall in the S&P 500 for buying the SPI 200 futures contract (a measure of the ASX 200 index) if the market can rally 20% of the previous 7 day average range above the opening price exit on the following day using a trailing stop below the opening price the day after entry.
Column l-1 represents the percentage fall in the S&P 500 futures contract from the previous days closing price while the other statistics show the odds for buying the SPI 200 contract following this overnight fall.
The US market in open during the Australian night and the Australian market open's after the US market closes, so we have this data prior to the open in Australia.
An analysis of the data above shows that on average a trader would have been better to buy into any strength on the Australian market following a down close in the S&P 500 over the past 15 years.
It also appears that the bigger the down move the more profitable it was to buy the SPI 200 contract on any breakouts above the opening price.
A quick glance shows that of the declines of 2.
5% or more have generally led to some pretty good rallies on most occasions, and the upside has outweighed the downside risk considerably.
It is however difficult to buy on these days as sentiment is always very negative.
A lot of people prefer to wait and see what happens, which is totally the wrong thing to do as once you've seen what's going to happen, the opportunity is no longer available! In summary an analysis of the past shows that it has been more profitable for a trader to buy into rallies following a down close on the US futures markets.
The table included with the article has outlined the past profits from buying the ASX 200 futures contract (SPI) using a volatility breakout above the opening price following a specific percentage fall in the US market.
I hope you find it useful.
Source...