Where is the market likely to close? – Part 2

Open to Close

The following shows a cross tabulation of where the market closed given where it opened. Before looking at the result table I wrote down what I expected the results to be. I expected that if the market opened above the VA then it is more likely to close above the VA than in any other area etc. These are the results of around 1,700 trading days of the ES.

			Close
		Above	In	Below	Total
	Above	65%	19%	16%	34%
Open	In	35%	33%	32%	36%
	Below	14%	21%	64%	30%
	Total	39%	25%	36%	100%

 

Ignore the Total column on the right to start with.

The top row shows us that of all the trades that opened above the VA, 65% closed above the VA, 19% in the VA and 16% below the VA. The next two rows are self explanatory and follow the same pattern. These figures are pretty much what we would expect except that the middle row is slightly off but by little enough that we can ignore this.

The bottom row (Total) shows us that irrespective of where the market opened (i.e. ignoring where the market opened) the market closed above the VA 39% of the time, in the VA 25% of the time and below the VA 36% of the time. This is more skewed than I would have initially expected.

The Total column at the end shows the averages of where the market opens in relation to the VA. This is roughly split into thirds each which is what we would expect.

On subsequent inspection the closing averages (bottom row) are not as surprising as I would expect. The value area is a restricted area based on 70% of the previous session's TPO count. As such the area above and below the VA gives far more area to move in and therefore more opportunity for price to occupy. i.e. more data points which the price can trade at exist on either side of the VA (far more prices) and this I believe explains this apparent anomaly.

Open to Traded

This next table shows us the percentage of times the market traded above, in or below the VA given where it opened.

					Traded
		Above	In	Below
	Above	100%	66%	30%
Open	In	66%	100%	64%
	Below	27%	68%	100%

 

This just deals with the open of the market (one of above, in or below VA) and where it subsequently traded. Obviously if a market opens above the VA then it will trade above the VA so 100% of the times that the market opens above VA it trades above VA.

If we take a look at the first row we see that when the market opens above VA it will trade in the VA 66% of the time and below the VA 30% of the time.

Does this make fading a down move at the bottom of the VA a good trade if the market opens above the VA? I don't know yet, that is on my list of strategies to back test. That will be posted in the Strategies part of the web once I have tested it.