No, I don't play golf.

Real Edge Needs Distributional Skills

No, I don't play golf.

  Money Management
Downloads Download
    No, I don't play golf.

We need trends to survive. Both in life and trading.
But how
to identify trends?

Below you can find my new trend indicator (yellow columns) which is quantifying the importance of a trend component in a time series, i.e. the statistical significance of persistence. The indicator is calculated with a VBA function (Microsoft Visual Basic for Applications) in Microsoft Excel.

The trend indicator is based on advanced statistics applied over different time frames, and can range from 0 for no importance to 1 if the series is pure trend.

 - In sideways markets the mentioned trend statistic is erratic and inconsistent
(as a result R squared is low).
 - In trending markets the trend statistic is stable and consistent
(as a result R squared is high).

sideways market (stay out) trending market (get in)  
a typical sideways market a typical trending market  


Some synonyms:

We should have a method to distinguish between

    - random drifts and trends
    - noise and trends
    - random events/fluctuations/trends and significant events/fluctuations/trends
    - random variation and "true" variation
    - deterministic trend and stochastic trend processes
    - coincidence and significance

R squared:
R squared (also
often referred to as R², correlation, or coefficient of determination) is a goodness-of-fit parameter which measures how perfectly a curve resembles a straight line with no jiggles.
The higher the R squared, the smoother the curve and so the better/desirable the fit.
can range from 0 for no importance (erratic) to 1 if the series is pure trend (stable).

A R2 value of about .33 indicates that 33% of the variance in the stock return can be explained by the data model.
The rest of the stock's variance is due to factors other than the data model.

Beware: R2 is a descriptive measure only for the goodness-of-fit, it is no measure for the quality of the estimation.


So this is a statistical method to identify trending and nontrending (mean reverting) financial time series.



back to top

© Copyright:
Thomas Pflügl 1998 - 2021

Last updated: März 26, 2021
All rights reserved.