Nasdaq Noise Band

The problem

Nasdaq futures tend to move a certain amount from the open every day. When they have moved more than the average on a given day, we consider it a bit strange, and decide to ride the trend, whatever it may be.

The idea

Take the absolute value of the move from the open for the last 14 days, and take the average of that. If today we are above that band, we take a long position to ride the trend; if below it, a short one. We aim to take moves that are outside of the typical ‘noise’ of a Nasdaq trading session.

Results

Sources

The paper defines the Noise Area from the average absolute move off the open over the previous 14 days, and takes the crossing of its upper or lower boundary as the sign of an imbalance worth trading. It studies the S&P 500 ETF; this book applies the same construction to the Nasdaq.