Monday, January 30, 2012
- In 252 trading days in 2011, NYSE stock VXX CLOSED DOWN 140 days and CLOSED UP 112 days.
- Probability of VXX closing up/down any day is 44/56.
- When VXX CLOSES UP, probability of next day closing UP is 50/50.
- When VXX CLOSES UP, probability of next day opening UP is 49/51.
- When VXX CLOSES UP and OPENS UP, probability of closing up is only 25/75.
Note Feb 9th: "Gambler's Fallacy" suggests that our 25/75 may be wrong and that the correct probability is 50/50 (see 3), not 25/75.
We believe our 25/75 is correct because VXX magnitudes and directions are not random events like flipping a coin, especially when consecutive, related VXX events occur in non-random manner.
Ask any race car driver what's the most important factor determining how he will come out of a turn. He'll probably tell you its how he entered the turn and not a statistical probability of how many times he has gotten through turn okay.
We would like to be corrected if we are mistaken, please.
- When VXX CLOSES DOWN, probability of
next day closing UP is 41/59.
- When VXX CLOSES DOWN, probability of next day opening UP is 42/58.
- When VXX CLOSES DOWN and OPENS UP, probability of closing up is only 17/83.
- When VXX OPENS UP, probability of VXX closing UP is 67/33.
- When VXX OPENS DOWN, probability of VXX closing UP is 26/74.
Comparing 9 and 10 in the table below shows that, when VXX opens up, %VXX gain will be about 4x and average price 2x more than when it opens down.
||10 open ||down
These 9 and 10 statistics are impossible to day trade on a day that opens up because %VXX is calculated based on previous day VXX close. They are, however, a good indication how %VXX will close on a day that opens up or down.
A possible strategy for trading these 9 statistics on a day-to-day basis -- Buy on close if up, sell losers on next day open if open is down.
Comparing some other buying strategies:
- Buyer 1 buys and sells VXX every day in 2011 on the close and would gain about 20%.
- Buyer 2 buys every day on the open if open is up, sells the same day on the close with about half the trades of Buyer 1 and would gain only about 10%.
- Buyer 3 buys on every open, sells the same day on every close, would be the real winner -- about a 40% gain.
- Buyer 1 --
buy / sell all on close -- 20% gain
- Buyer 2 -- buy all on open if up / sell all on close -- 10% gain
- Buyer 3 -- buy all on open / sell all on close -- 40% gain
We are unable to explain cause(s) of these differences. Maybe you can.