It is generally believed that markets tend to mean-revert. But this is true for some markets more than others. Here’s an in-depth look at how the S&P 500 responds to mean reversion.
Mean reversion is not a universal phenomenon; some markets have a tendency toward mean reversion, while others don’t. This has led a number of analysts and traders to look upon mean reversion with some degree of suspicion. If mean reversion has a solid statistical foundation, should it not be applicable to all markets all the time?
The simple truth is that some markets respond well to mean-reversion strategies, and others don’t. There are several possible explanations for this, including what factors drive the instrument’s price (macro economics, earnings, news, and so on); the number of market participants; the ability to take short positions; the volumes involved; and the average volatility of the instrument in question.
Continue reading Mean Reversion And The S&P 500 By Stephen Beatson
Here’s how to start with the basics and determine if an identifiable event has a statistical edge in predicting future prices—before you even start to build a trading system.
Many trading systems begin with indicators, and because of that, the question you should be asking is, “What do indicators indicate?” The correct answer is that most of the time, they don’t indicate much. Indicators are just specialized filters.
Continue reading Trading System Design: A Statistical Approach By John F. Ehlers and Ric Way
News data, which has long been the province of institutional traders, is now making its way into the hands of retail traders. Here’s a look at how you can incorporate this data into your trading strategies.
We all know that news moves the markets, but what is less easy to determine is exactly how the market will react immediately after the news event as well as later, once market participants have had a chance to digest and analyze the news in more detail. The algorithmic interpretation of these news events and more detailed news stories has long been the province of the hedge funds, which have the resources to spend on research & development in this specialized area. However, as with most advanced technological developments, there comes a time when it becomes more widely available. The use of news analytics and news sentiment has reached this point, and more and more traders are now gaining an edge by using news data.
Continue reading News Sentiment By Stephen Massel
Trading signals generated by the crossover of Gerald Appel’s moving average convergence/divergence and signal lines are popular and simple to use. Do they work for all stocks in all market conditions? Find out here.
The moving average convergence/divergence (MACD) signal line crossover is a popular technical indicator used by many traders and investors. The MACD was developed by Gerald Appel in the 1960s and is readily found in trading platforms of all types. It generates trading signals upon crossovers of its MACD and signal lines. The method is considered simple to use; however, many have doubts about how effective the method is. To find out whether the technique works, I conducted a backtest on a large portfolio of stocks traded on the major exchanges. The results of the backtest will help determine the level of effectiveness of the MACD method.
Continue reading MACD-Suitable Stocks By Kevin Luo
Forex traders need to keep an eye on fundamental data such as interest rates, central bank policies, and economic data. In this article, we’ll take an in-depth look at these fundamental variables.
Just as in equity trading, there are two basic approaches to formulating forex trading strategies. In my previous articles in this series, I already introduced you to technical analysis. Its counterpart is fundamental analysis, which looks at issues like interest rates, central bank policies, and economics to make trading decisions. In this way, it is similar to dissecting the financial statements of a company when deciding whether to buy its stock.
Continue reading Trading Forex: Fundamental Analysis By Imran Mukati
Seeing a simple breakout may convince you to place a trade, but how do you know if a breakout is really a breakout? Here’s one way you can jump into a trade and not get caught off-guard.
Developing a consistent approach to identifying and trading breakouts that continue in an uptrend after a trade has been placed is a common challenge faced by active traders. Traders may often enter a position based on a simple breakout above new highs, which subsequently consolidates or pulls back, causing stop losses. Trading breakouts based on simple price action or candlestick patterns alone runs the risk of buying near a pivot or exhaustion area. Similarly, relying too heavily on complex lagging indicators like moving average convergence/divergence (MACD) crossovers, relative strength index (RSI), or stochastics can generate false positive entry signals and lead to overtrading weak signals.
Continue reading Swing Trading With Momentum On Your Side By Ken Calhoun
Much forex trading by speculators is based on technical analysis. In this third part of an article series on trading forex, we’ll look at what technical tools you should focus on.
Earlier in this series, I mentioned that forex trading is in many ways simpler than equity trading, since there are far fewer currency pairs than there are stocks. It is also important to understand that currency prices move differently. While a stock can climb or fall within a huge range — to pick an infamous example, Enron peaked at $90.56 per share in August 2000 and fell to $0.26 by November 30, 2001 just before its bankruptcy filing — currencies, by comparison, tend to move within a relatively narrow band or channel. This is because each currency represents buying power in its home country, which will only vary so much within the global economy, and because central banks intervene to affect valuation in the event their currency becomes too strong or too weak.
Continue reading Trading Forex: Charting Your Way By Imran Mukati
White noise, pink noise — does it make a difference? It sure does, and here is how you can use noise theory to create an indicator with zero lag that works both as a countertrend oscillator and as a trend identifier. Noise spectra are often described by color. Just like white light, white noise contains all frequency components having equal power. When I surveyed analysts’ description of market data, it led me to the conclusion that they describe it as pink noise. Pink noise is noise with memory, and I use this noise-with-memory concept to derive a market data synthesizer.
Here’s What I Did To Make It Useful
I turned the data synthesizer inside out to derive a white spectrum from the observed data. While simple, it is profound, because whitening the data negates the phenomenon I have called spectral dilation. Just because the derived white noise spectrum has uniform amplitude at all frequences, it does not preclude the waveform from containing information. I then show how to extract the information in the waveform using a SuperSmoother filter. Since the derived waveform has a uniform power density at all frequencies, a range of optimum indicators can be created. These optimum indicators can be used on intraday data, in short-term trading strategies, and in longer-term trend followers.
Continue reading Whiter is Brighter By John F. Ehlers
Forex, foreign exchange, FX — they all refer to the trading of, or exchange of, one foreign currency for another. While the practice began simply as one of many routine banking mechanisms, it has recently evolved into a speculative market — that is, some people and institutions trade currencies strictly to make money.
The advenT Of fOrex markeTs
From the 19th century until World War I, the economically developed nations of the world adhered to the gold standard. To simplify a complicated issue, a nation’s wealth depended on how much gold it possessed, because the currency of any nation on the gold standard had a set value relative to gold. The British pound, for example, was fixed at the equivalent of 113.00 grains of pure gold, while the US dollar was fixed at 23.22 grains. This meant that a nation could only issue the total amount of currency that it could back with its gold reserves. In practice, some nations held a combination of gold and other currencies also backed by gold, but the end result was the same — a limit on its total currency in circulation. You may have already realized that such limits on a country’s currency also limit its government spending. This is precisely why World War I caused a breakdown in the gold standard system.
Continue reading Trading Forex: Understanding the Basics By Imran Mukati
In this second of a two-part series on managing risk, we look at how to overcome the disadvantages of diversification. (Read Part 1)
In part 1, it became clear that we need to bring profits and total return into the equation to evaluate the effects of diversification. However, it’s necessary to look beyond its common risk-lowering incentive and gain a more holistic view of diversification. While the advantages on the risk side are beneficial to all traders, from expert to layman, you mustn’t be blind to the disadvantages, mostly on the profit side. Diversification will spread risk, and hence lower it, but at the cost of averaging your returns. Let’s see if we can put this knowledge into practice.
Continue reading Fine-Tuning Your Risks By Dirk Vandycke