Came across this blog, where the author explains the statistical behavour of markets.
Wrote a little app to do some number crunching of the ASX since 1980, and came up with numbers/corresponding graph which are pretty much identical.
Again from the blog :
For a short term trading system, this could be something to consider. (I haven't done anything with this yet). I guess what made me curious was all the headlines that are getting almost commonplace, regarding winning streaks, esp. for the Dow.For discretionary trader, the statistical behaviour of the underlying instrument is an independent confirmation from his/her usual technical analysis tools. The odds of a reversal from an extreme price level is increased significantly when the distribution reading is confirming the bias.
For a system trader, have you ever used runs distribution as a filter for your trading systems? It is one of the rare tools that can improve a trading system without causing curve fit issues.
In short, if you trade 15-minute time frame, with a long position, then it is pretty obvious that after 3 bars of consecutive higher closes, even if you are not closing out your position, it is very important that you have a proper stop order in place to protect your position.