After doing my Harmonic Rotation Study for the ES, I wanted to test a hypothesis that once we have a large move, which I will define as anything larger than 2 standard deviations above the mean (1.75 points in this case), how much of a pullback will we get once that move is finished, and then how large is the continuation move after the pullback? My theory is that such a large move should result in a smaller pullback given the amount of strength for the initial move, then the continuation after the pullback should be larger than average as traders carry the trade on in the same direction.
Here’s my study:
The 1st set of data is the pullback move, or what move we get after a move larger than 2 standard deviations. I calculated the frequency of the size of each move, averaged it against the sample size to get a percentage of how often a move of that size happened. I then compared that percentage against what the normal percentage was to determine if there was a statistically significant difference between the 2. As you can see, there is a slight increase in the likelihood of the move being smaller than average, but only by 3%, not enough of an edge in my mind.
I also did the same for the next rotation after the pullback. The data shows that there is a slightly higher chance of a larger move, but again, not enough of a difference to really make a trading edge.
The pitfall of this study is it only takes the next 2 harmonic rotations. And since the distribution is so heavily weighted to the lower end, it makes sense that there isn’t much of a difference here. However the next part of my study will look at the cumulative sum of the next N rotations to see if the move is likely to continue in that direction, even if it takes more than 1 rotation.