asymmetric bias in the markets?

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edward kim
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asymmetric bias in the markets?

Post by edward kim » Thu May 08, 2003 12:36 am

I'm not sure if we covered the topic of biases in various markets, so I hope I'm not reposting.

I've been wondering if there was tendency for systems to work better (using the same set of parameters) going long than short, and vice versa? In the futures markets, does the hedger bias have an impact on rallies and washouts? I'm wondering because equity markets tend to have bigger daily downsides than upsides, and bear markets seem to last for a shorter period of time than bull markets. Could the fight/flight response be more pronounced during sell panics? (this of course is in reference to the collective of all participants in the market)

For my own system tests, equities seem to capture more profit on the downside (my system used data going back 12 years, so I'm not only looking at the recent 3 years.) My futures market tests showed a tendency to be symmetrical. It would be interesting to see what other people's results are.

Edward

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Post by Kiwi » Thu May 08, 2003 6:32 am

I cant speak for my own tests on this area.

I did talk to a system developer of well regarded long term systems about it after observation and cursory testing suggested that for many futures markets bottoming behaviour was different to topping. He had run the tests and could improve performance --- but he didnt because he would then have too many parameters and excite negative reviews for that change.

If you look at gold (as an easy example) then I have found that you could put a stop directly over any X day tops and it will be honoured more often than not if the market is going down. With bottoms/swing pivots in an uptrend however you can expect them to be penetrated by more than 1/4 ATR before the market proceeds up further.

John

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Post by edward kim » Fri May 09, 2003 1:32 am

Hi John,
Kiwi wrote:If you look at gold (as an easy example) then I have found that you could put a stop directly over any X day tops and it will be honoured more often than not if the market is going down.
What is meant by "X day tops"? If it is any way related to identifying a top, how would you know that it was a top until after the fact?
Kiwi wrote:With bottoms/swing pivots in an uptrend however you can expect them to be penetrated by more than 1/4 ATR before the market proceeds up further.
What is meant by a "swing pivot"?

Thanks for your observations so far - since these items have to do with one-day or several-day characteristics, how about the bias when it comes to longer term situations? Do you find that your trading methodology works better going long then short? Any additional comments would be great!

Edward

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Post by Kiwi » Fri May 09, 2003 7:37 am

Good questions. I'm not actually trading gold this way at present as my money and mind is tied up elsewhere ... this was part of something I did a year or so back.

What I meant by X day tops and swing pivots (sorry about loose language) was (from memory) if you have 5-10 days lower than the current high preceding that high and it then heads down for at least half that number of days you can declare it a likely 5 day pivot.

When heading down it will tend to honour the highest price in those last 7-15 days if it is really going down. When heading up it will not ... it will frequently test and penetrate the low before heading up further.

A good example of asymetric behaviour which could be easily incorporated into a system.

Regards, John

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Post by edward kim » Mon May 12, 2003 1:10 am

Thanks for the clarification John.

How about overall system profitability? If I use the same parameters and money management principles going long and short, my cumulative profit for that market seems to be higher when I am shorting than when I am going long. This seems to be the case for all equities and stock indices that I test, but not so much for futures.

The total profitability on long and short transactions in my sytem indicates to me that that there is a bias for the equities markets. I keep repeating myself from the first post because this suggests that systems can also be asymmettrical to improve performance.

Edward

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Post by Kiwi » Mon May 12, 2003 1:50 am

You say that your short profitability is higher than long.

Is that because the test is during a period while the bias (== long term trend) is downwards? If not, what is your theory?

In my experience testing commodities it varies but I noticed no consistency except that it was alway easier to "trend trade" in the direction of the next higher timeframe trends. So when discretionary this is what I do.

Trading to remove volatility from stock indexes can provide higher rates of return short because the markets go down faster and up from a bottom quicker. Many seem to find these markets harder to trade profitably - I think that this is probably because the speed means that their timing has less room for error.

John

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Post by edward kim » Mon May 12, 2003 2:41 am

Looks like we agree on a very similar note John - I talked about my system results in the first post, and my data for equities goes back 12 years. My cumulative profits came more from the downside even though the data I used has an upward bias (my data started in the Persian Gulf War time) - this MIGHT mean that the majority of stock market participants "act" a certain way when stocks go up, and "act" a different way when the market goes down. I also saw no bias difference in futures markets during my testing.
Kiwi wrote:Trading to remove volatility from stock indexes can provide higher rates of return short because the markets go down faster and up from a bottom quicker.John
Can you explain and give an example of "Trading to remove volatility from stock indexes can provide higher rates of return"?

Thanks,

Edward

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Post by Kiwi » Mon May 12, 2003 3:07 am

An example would be buying into a fall .... say by buying call options as the market falls when you think it will return. Then you sell them when it bounces back. Because the fall/bounce is steeper than a rise/bounce down you get a higher rate of return.

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