Issue 12 Tuesday November 16, 2010 $TICK - Tock - Testing the NYSE TICK Index By Erik Skyba, CMT Senior Market Technician, TradeStation Labs TSLabs@TradeStation.com Focus Technical Study Markets Equities Futures Time Perspective Intraday Summary If you search for the words NYSE Tick Index on the Internet, you will find links to many articles touting the success of using the Index as a trading signal. These articles claim that there are various levels and rules that can be used to generate profitable trades. For example, one theory is that the -1,000 and +1,000 levels are important action points on the Index. In this paper, we will discuss the NYSE Tick Index, rules that are commonly associated with trading signals, and, most importantly, whether or not these rules can produce successful trading results. Whether you re a discretionary trader or a systematic trader, you ll find that the NYSE Tick Index may provide insights that you should be aware of when trading. Studies/files Included PaintBars Workspace Introduction The NYSE Tick Index, ticker symbol $TICK in the TradeStation platform, is a short-term barometer of internal market strength. We typically call these types of indexes market breadth indicators. This particular Index is calculated by subtracting the number of stocks on the NYSE that are currently on downticks from the number of stocks on the NYSE that are currently on upticks. For example, if the number of stocks on an uptick is 1,000 and the number of stocks on a downtick is 500, the NYSE Tick Index will be +500. This value constantly changes and values above zero are bullish while values below zero are bearish. However, the common convention among traders is to use $TICK to signal trades when the Index is at extreme readings, as a contrary indicator. In other words, if the Index has a reading below, say, -600 (market is moving lower), a long trade should be taken; if the Index has a reading above, say, 600 (market is moving higher), a short trade should be 1 P a g e
taken. Figure 1.0 is a list of all the available tick indexes in the TradeStation platform. We chose to conduct our analysis on the NYSE Tick Index ($TICK) because it s the most popular of these indexes and has the most historical data for testing purposes. Figure 1.0 Tick Index Symbols List Background Market breadth indicators are exclusive to the analysis of stock indexes. They are used to measure the internal strength of an underlying market or index by examining the net action of the component stocks within that market or index. In analyzing these components, this internal diagnosis can be very helpful in confirming the strength of a trend or providing early warning of a change in trend. This is often done by monitoring for positive and negative divergences. Market breadth divergences occur when the internal market breadth does not confirm the underlying market direction. The NYSE Tick Index is one of many market breadth indexes that are available to you in the TradeStation platform. These include other net tick indexes as listed above, as well as Advance-Decline and Moving Average-based market internals. Traditional Application Discretionary Traders There are three levels on the NYSE Tick Index that discretionary traders commonly watch when entering long trades. These levels are typically the -600, -800, and -1,000 levels. As mentioned earlier, traders usually view these levels in a contrarian sense. When the NYSE Tick Index hits any of these negative levels, traders often interpret this as an indication of an oversold condition and look for long 2 P a g e
entries. It is important to point out that traders do not use the corollary positive Index readings (+600, +800, and +1,000) in initiating short trades. There is good evidence from our testing as to why this is the case. Testing Scenario Before we begin to examine our results, let us describe the testing conditions, shown in Figure 1.1, and the rules for this study. Figure 1.1 Testing Conditions Strategy/Study Style Short-Term Asset Type Futures Symbol 1 (for backtest) @ES.D Symbol 2 (for backtest) $TICK Alternative Symbols to Trade SPY, QQQQ, IWM Data Interval 15 minutes Period Tested 10 years Shares Traded 1 Contract Commission/Contract $2.50 3 P a g e
When testing or trading other stock-index futures or ETFs such as those listed in Figure 1.1 as Alternative Symbols to Trade, please consider testing some of TradeStation s index-specific net tick indexes as listed in Figure 1.0 above. Defining Study s Rules to Test Long Entries (this study was restricted to Long Entries and Exits only): Exits: Analysis Buy when NYSE Tick Index crosses below: (these are each separate tests) o -600 Level o -800 Level o -1,000 Level Exit the trade after a defined holding period, as measured in bars (1 30 bars). Of the three NYSE Tick Index levels that we tested for long entries (-600, -800, -1,000), the best performance was attained by taking trades when the Index crossed below the -800 and -1,000 levels, while the worst performance occurred when the Index crossed below the -600 level. The TradeStation optimization reports (Figures 1.2, 1.3, 1.4) show the different results for these levels. We can see from Figure 1.2 that when the Index crosses below the -600 level, the trades consistently showed poor results at all holding periods from 1 to 30 bars. Figure 1.2 Testing Condition 1 Buy when the NYSE Tick Index is below the -600 level and hold an open position for x number of bars. 4 P a g e
Figure 1.3 shows the testing results when the Index crossed below the -800 level. Notice that the Net Profit, Profit Factor, and Max Intraday Drawdown, all on average for each holding period, from 1 through 30 bars look much better and the Net Profit is now consistently positive. Figure 1.3 Testing Condition 2 Buy when the NYSE Tick Index is below the -800 level and hold an open position for x number of bars. Figure 1.4 shows the testing results when the Index crossed below the -1,000 level. Again, the results are positive for almost all holding periods. Profit Factor is even higher, than the results from the -800 Index levels and the Max Intraday Drawdown is lower, on average, than the -800 levels. Figure 1.4 Testing Condition 3 Buy when the NYSE Tick Index is below the -1,000 level and hold an open position for x number of bars. 5 P a g e
Figures 1.5 and 1.6 are graphs representing the net profit vs. the number of bars holding period for the -800 and -1000 levels. In figure 1.5, the graph shows a positive net profit on average for each holding period. However, in the very beginning of the graph (bars 1 4), net profit was low but improved to much higher values on the rest of the bars. Figure 1.5 Bar graph of NetProfit vs. Barsout (1-30) (Testing Condition 2 NYSE Tick Index crosses below -800) 6 P a g e
Figure 1.6 looks very similar to Figure 1.5. Net profit is positive for all bars on average, with the exception of bars 22 25. Figure 1.6 Bar graph of Net Profit vs. Barsout (1-30) (Testing Condition 3 NYSE Tick Index crosses below -1,000) Conclusion We began the process of testing these NYSE Tick Index rules with the most common sets of rules used by discretionary traders. This led us to examine mean reversion trades. In this case, a mean reversion trade would occur when the NYSE Tick Index signaled an extreme oversold reading; while the -600 level might not be extreme enough, the -800 and -1,000 levels certainly support the theory. In preparing for this study, we noticed that almost no information exists on using the Index to take short trades. We might assume that the short trades would be initiated at the exact opposite levels of our long trades. Some of the analysis we did not include in this paper might be considered good reason to question that assumption. When we tested the short trade idea, net profits across the board for the +600, +800 and +1,000 levels were all consistently negative for all holding periods up to 30 bars. So the reason why traders do not initiate short trades at these positive Index levels may be because they just are not profitable, which is what the trading community literature indicates. Please note that our testing was not limited to the 15-minute interval that was the basis of our analysis. We observed many different intervals (15 through 30 minutes and 40 through 60 minutes) and found the same general pattern: as the negative tick level becomes more extreme, the profit pattern improves. 7 P a g e
What can discretionary traders gain from this information? When the NYSE Tick Index crosses below the -800 and -1,000 levels, the stock market has a tendency to rise, at least for our tested holding periods of 1 to 30 bars. And this pattern is not exclusive to the 15-minute bar intervals; it was apparent at a number of intraday intervals with Net Profit, Profit Factor, and Max Intraday Drawdown all improving as the level crossed by the Index becomes more negative (-600, -800, -1,000). To use the files provided with this issue of Market Concepts: Files with extension.eld These contain EasyLanguage documents: analysis techniques and strategies. Double-clicking on this file will start the Easy Language Import Wizard. Follow the prompts to completion. The analysis techniques or strategies will automatically be placed in the correct locations for your use in TradeStation. This should be done before opening any workspaces provided. Files with extension.tsw These are TradeStation workspaces. These may be stored in any folder where you choose to save TradeStation workspaces. Files with extension.txt These are text versions of the EasyLanguage documents and are generally used only by advanced EasyLanguage users. Other supporting documents or files may also be attached to the report. All support, education and training services and materials on the TradeStation Securities website are for informational purposes and to help customers learn more about how to use the power of TradeStation software and services. No type of trading or investment advice is being made, given or in any manner provided by TradeStation Securities or its affiliates. This material may also discuss in detail how TradeStation is designed to help you develop, test and implement trading strategies. However, TradeStation Securities does not provide or suggest trading strategies. We offer you unique tools to help you design your own strategies and look at how they could have performed in the past. While we believe this is very valuable information, we caution you that simulated past performance of a trading strategy is no guarantee of its future performance or success. We also do not recommend or solicit the purchase or sale of any particular securities or derivative products. Any symbols referenced are used only for the purposes of the demonstration, as an example ---- not a recommendation. Finally, this material may discuss automated electronic order placement and execution. Please note that even though TradeStation has been designed to automate your trading strategies and deliver timely order placement, routing and execution, these things, as well as access to the system itself, may at times be delayed or even fail due to market volatility, quote delays, system and software errors, Internet traffic, outages and other factors. 8 P a g e