5 nights with open above the high of the day before is really an unusual and rare market behavior. Nevertheless it happens, odds didn’t played in my favor and ended with a new loser trade. Tonight I’m still handling with four different bearish patterns and a slightly bearish seasonality. If I see a close still above today’s open I will try a short entry again tonight and hope to take my money lost back.
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This mathematical effect goes back to its discoverer Claude Shannon:
Markowitz portfolio theory is entirely based on the Shannon's Demon Effect: a portfolio of financial instruments or trading systems can beat the average return of all its components only if their correlation is low or, even better, is negative.
These computational effects are also stronger the often the portfolio is rebalanced.
This incredible edge coming from diversification can even transform a two systems portfolio with negative returns in one single low correlated and frequently rebalanced porfolio with a positive average return.
In this file:
I show how overall results are boosted by Shannon's Demon with 3 simple strategies that are rebalanced daily. One buys long each night from close to next day's open, one from close to next day's close and one from open to close (intraday). It is clearly evident how much overnight trading has a low correlation with other time frame strategy proxies and why it should be included in a trader's portfolio.
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Marco Simioni
NIGHTLY PATTERNS - Overnight Trading