Trading Autocorrelation?

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In an earlier post, I discussed how fat-tails autocorrelation trading indicator a reason for Trend Following success or in technical terms: However, there is something unsatisfying in that explanation: However, the conclusion of this paper was that Trend Following showed superior performance.

Additionally, there is definitely a measurable edge to Trend Following entries such as this Donchian breakout e-ratio calculation shows. Random entries would not show such autocorrelation trading indicator edge.

So, there must be something extra to the kurtosis story explaining Trend Following success…. One hypothesis autocorrelation trading indicator I want to autocorrelation trading indicator further is autocorrelation also referred to serial correlation.

One of the main principles of Trend Following entries autocorrelation trading indicator in the face of conventional wisdom — is:. The point is that Trend Following entries are made at extremes, in the direction of the extremes. If market exhibit positive autocorrelation at extremesit can be derived that following the direction of the extreme moves should provide an edge positive expectancy. This would explain autocorrelation trading indicator Trend Following entries perform better than random entries autocorrelation trading indicator why Trend Following is a superior strategy to buying Out-of-The-Money options.

To check this, I am planning to run some calculations on historical prices and see autocorrelation trading indicator markets exhibit such autocorrelation at extremes. Another aspect that will be autocorrelation trading indicator to look into is whether this autocorrelation evolves over time and whether these autocorrelation levels are autocorrelated themselves ie is there some degree of predictability in the autocorrelation evolution.

Now, please note that I autocorrelation trading indicator stepping out of my comfort zone here: Might set myself up for some hardship but as we say in French: I am also thinking of getting one or two Econometrics books to give me a headstart on this.

But if any of you clever readers have any suggestions or tips on any of the above, please let me know. Your theory is correct on average. Trading in the direction of a fat-tailed move has proved to be a generally good strategy. Generally is the key word, though. Long story short in trend following you are working with the law or large numbers and to get to those large number in many cases you will need to have an iron stomach.

Love to see the result from the autocorrelation calc. Did it myself, but had not enough time autocorrelation trading indicator do it correctly. Had a hard time to get a much different number then zero in stocks minutes intraday. I think the result will be a bit different when comparing stocks to indices where in my opinion trendfollowing and mean reversal is different too prob. Maybe intraday and interday have a different profile as well.

Joost- Was thinking a bit more in detail about how to calculate this correctly. As you say it might be autocorrelation trading indicator bit more complicated than it sounds to do it correctly but I am planning to do it at some point.

Unless your signal is at least piece-wise stationary. If it is, try using a forier transform of your autocorrelation data spectral analysis plotted in loglog time and magnitude.

You should get some pretty interesting results if piecewise stationality autocorrelation trading indicator valid. Artur, I do not think there is any answer to that question ie how to measure non-linear correlations. See autocorrelation trading indicator page that gives a bit more explanation on the subject. The highlighted sentence is a great insight in itself: I do not think you need autocorrelation measurements etc etc, are you hoping that the strength of the autocorrelation will tip you whether to take a trade, etc?

I think the corollary of your sentence is that: The big part of their success is that they cut their losses when the market retraces from the extremes. Anyways, your two posts, this one and the other one that describes how tf hangs on the positive fat tail, avoids the negative fat tails are very nice insights, thanks for sharing.

Novice trading, even when done by experienced people who have been successful in the past, is to hang onto negative fat tails big losses and cut the positive fat tails. I once wrote to myself. I have to say your comment came as a good reminder about this old post and project idea.

I have not pushed this much further for now, but indeed the underlying idea was to check if the strength of the autocorrelation prior to the extreme is a good predictor of continuation of the move so that it could be used in some sort of regime filtering: You have autocorrelation trading indicator point. Indeed, autocorrelation trading indicator price behavior changes at the extremes say, LT support and resistance trend following strategies could have an edge.

There is evidence the sup and res could act as attractors. The argument is that there are order clusters in those regions and statistical tests support this claim. BTW, forget these econometric books. What you need is: I will send you an email. Notify me of followup comments via e-mail. Sy blog, Systematic Trading research and development, with a flavour of Trend Following.

Past performance is not necessarily indicative of future results. Futures trading is complex and presents the risk of substantial losses; as such, it may not be suitable for all investors. Autocorrelation trading indicator content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or autocorrelation trading indicator any security or financial instrument, or to participate in any particular trading or investment strategy.

The ideas expressed on this site are solely the opinions of the author. The author may or may not have a position in any financial instrument or strategy referenced above. Any action that you take as a result of information autocorrelation trading indicator analysis autocorrelation trading indicator this site is ultimately your sole responsibility. Sy blog — Au tomated Tra ding Sy stem. Sy recommends CSI Data. Why Trend Following works: Free Updates By Email: Were the Turtles just lucky?

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