good saturday to all!
Last day i was discussing with a new friend of mine (a great trader/researcher from Chicago) and i was glad to see that he sort of liked the fact that i was considering time frames as arbitrary, while my "clock" is based on actual price move. Like having a watch which "beats" on a regular price scalp distance. Then we were discussing about the "speed" concept and he rightly pointed out that "direction" is a distinct concept.
Here i would like to discuss/propose some indicators of SPEED and, say, DIRECTIONALITY i am implementing in the trading system. Please feel free to correct me when you see errors or
have a different opinion.
What is <b>"SPEED"</b> ?
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I have heard using informally this term and i think we all have some sort of "intuitive" idea of what speed is. Do we ?
[First of all let's make a distinction about the technical use of the term in the GBM with mean reversion where the word "speed" is refers to the parameter expressing the "speed of reversion" to the mean. We disregard for now this meaning.]
Well one migh say, "speed" is the same of <b>"volatility"</b>. Why need to bother while we already have the concept in place? Well, volatility is a measure of how much variation there is in the relative price changes. So does this coincide with our intuitive concept of "speed" ?
Volatility is dependent on the timeframe where we measure it. But we just said we dont really care about abstract timeframes because all what matters, to us wanting to make money from market, is not to create abstract indicators, but metrics that are specific for trading, and that in this case would rather depend on our special clock based on scalp lines. This way the measure
would be more meaningful to the trader, than a "standard deviation" of returns.
So given the above considerations, i define SPEED, for my purposes, as follow.
Definition: <b>"Absolute Speed"</b> (we will later define a <b>"Signed"</b> speed) is the intuitive concept measured according to the following procedure:
- We have a fixed system of scalp lines (example: the distance has value $ xxx, fixed for all instruments. Later we will examine the case of different scalp sizes). While the price curve runs we take note of the "scalp line hit" defined as the pair: H =(Instant of hit, Price)
We maintain an ordered list if these hits. By ASSUMPTION adjacent hits will have DIFFERENT prices.
I define an ABS_SPEED measure as <b>the average number of scalp lines visited per hour (or other convenient unit of time)</b>. Further, we would keep only a predefided number of last hits (example: last 20 hits), because we are interested in a "dynamic", or "trailing", measure, based on current data. In a formula:
Abs_Speed = ( Hit count - 1 ) / ( Total time between hits )
with Hit count >= 2, or, better, Hit count >= a min value we specify, for the measure to "make sense".
<b>DIRECTIONALITY</b>
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We are trading and we see, from our window, 2 fast joggers, we imagine they will continue running up to a distance which is greater depending on the speed. This does not mean that two runners with same speed might go equally "far" from us. In fact one could actually run away (was that Sly?
) ), while the other could keep running around our block
We need to make a distinction, say, about "Sideways" and "Directional" speed. So i define:
Abs_Speed = Sideways Component + Directional Component = S * Speed + D * Speed
where D + S = 1.
Let's see how to define these 2 coefficients (proposal):
D = normalized number of "different hits"
S = complement to 1 of D
where 2 hits are defined as "different", if the prices are different (comparer is price based).
Let me know your thoughts so far, so i will continue this attempt of formalization of useful concepts/metrics for our specific purpose of trading and making $ ...
Tom
