IWM – Inside a daily range percent band

I was looking to see if it was possible to have a high probability trade that was +/- some percent of the recent average daily range.  For example, if the daily range was around 1 point, and the IWM opened at 60, if you had set up  trade that would sell around 60.10 and buy around 59.90  ( +/- 10%) how often would your trade be profitable?  Not a system, but just a premise.  I looked at the last 1000 trading days of IWM, with the range being the previous 10 days.  Based on previous finding indicating that 28% of the days don’t reach 10% of the range, I wasn’t too optimistic, and the figures seem to confirm this.

range (+ / -) % of days both high and low outside of average range above high high above range below low low below range
0% 98% 0.78% 989 0.89% 989
5% 87% 0.75% 927 0.84% 940
10% 72% 0.74% 840 0.81% 875
15% 58% 0.70% 770 0.77% 811
20% 46% 0.67% 713 0.76% 743
25% 35% 0.64% 651 0.76% 683
30% 26% 0.60% 593 0.72% 638
35% 19% 0.56% 542 0.70% 598
40% 14% 0.56% 484 0.68% 555
45% 10% 0.51% 444 0.66% 505
50% 7% 0.52% 402 0.65% 451
75% 1% 0.55% 198 0.60% 273
100% 1% 0.47% 95 0.60% 145

I find columns 2 and 4 particularly interesting. This is the median percentage (half above, half below) that the day high (day low) price was above the percent of range. For example, in line 3 – 10% of range, if the stock price had increased 10% of the average range, then half of the time it would continue at least .74% more. If it increased to 20% of the range, half the time it would continue .67% more. Or using the example above, if the stock opened at 60, and had a range of 1 pt, then if the stock hit 60.10, then 50% of the time it would exceed 60.54 (60.10*(1.0067)). If the stock continued to rise to 60.20, then 50% of the time it would exceed 60.60 (60.20*1.0067).  If it reached 60.50 (50% of daily range), half of the time it would continue beyond 60.81.  I was thinking that the median shouldn’t move, but that might be poor thought process on my part.

The fourth and sixth columns are the number of times out of 1000 that the high (low) exceeded the indicated percent of range (from open to high or open to low, divide the numbers by 10 to get percentages) (the second column is the percent of time both the high and low were outside of the range).  If you were to scale the Y axis in the first graph as log, then it is relatively straight line for most of the data.  I’m still puzzling over the implications, particularly columns 3 & 5 and placement of stops.  No where in the study is the closing position or how much retracement from the high (low) after hitting the high, so it might not have much significance.



Additional movement beyond range:

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