Backtesting

jack hershey · Feb 12, 2007

Look for the green

Quote from Ezzy:

Jack,

I know this is getting off topic here, but could you answer a few more questions

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Quote from jack hershey:

I attribute periodicity to three independent variables of the market. It turns out that the lowest frequency is price. the period of volume is half that of price (Twice the frequency.

I used this relationship to depict the P,V relationship in boolean algebra and a combination of two if then statements.
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This is where sometimes the gaussians get confusing, where in one price cycle you have two volume cycles (which would seem to indicate two volume gaussians). So instead of black vol rising, red falling (one gaussian), you can get black rising then falling - and then red rising and red falling (two gaussians, one all black and one all red); finishing the the price cycle. I guess it's not really confusing, it just seems to indicate a different mode.

What to llok for here is the wave form of the Gaussian. Sometimes on charts the display is not close to close but open to close on the same bar. the closer you get to low volume situations, the greater the noise to signal ratio on price.

Once you begin to look at the concurrent conditions on the three channel levels it gets much clearer. I SCT journal we will be adding all three levels soon. By the time wee get to fine, you will actually have thre charts ES...YM... and both one tick range tick charts.

At that time our attention will be steered and fucussed on what is unfolding in NOW for decision making.

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I felt that the cycle of P, V could be extended to another degree of freedom for increased trading sensitivity. So I added another market independnent variable. It may be considered to be sentiment and I express it as A/D where A is accumulation and D is distribution. Both are broadly understood.

It turned out that there is a periodic relationship that is part of the P, V relationship. the frequency of A/D is twice the volume and Four times the price fundamental frequency.

Scoring was the resulting boolean concept that resulted. All trading universes can be sorted by using the three variable frquency concept. thus the cycle of price is divided into 8 parts and the combinations of the variables define the sequence of the cycle. 0 to 7 is the trough and 4 to 3 is the peak. All three variables go through change as expected at these end effects.
crossing the axis of the cycle (acceleration to deceleration ) involves two of the three variables.

The four other dividing lines occur with only one variable changing (A/D)
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While A/D is a broadly understood concept, it was mentioned at some point how different measures can be used, BOP for example. That particular measure might stay in accumulation mode while price and volume cycle several times. That would cause some missing numbers in the scoring sequence going from trough to peak.

So to have an A/D measure that would have twice the frequency of volume, well the only thing I can think of might be the DOM showing a shift in sentiment.

This is a good observation(s). when we select stocks according to the criteria, we are mainly focussing on the EOD level of trading in an IT term that is long. for high quality stocks it is possible to not have worden type indicators give you daily and intraday variations. I have the beta version of snapsheet and even there you cannot backtest with iether drag and drop stuff of custom stuff that gets "down" to details.

The same may be said for the IBD newspaper A/D ratings and EOD dailygraphs.

I feel that we only have about 2 to 3 years to go until the platforms come up to speed on this.

The workaround can be done by using an intraday approach. The stoch 5, 2, 3 works well. The charts to use are the 30 min and the fifteen min. Here you can get to see the 4 to 8 day cycle operating and the A and D fluctuate within the high quality long IT channel and its dominant traverses.

There is another factor in that from day to day there is often economic news that freaks out brokers and their clients.

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Price is the dominant wave form and the volume Gaussian I use and you see on charts is functioning at twice the frequency of the price trending.

Thus for starters, you always know where you are, what is next and how fast things are changing.

A channel setting up involves point 1, 2, and 3. By this time you see the "trend" and the volume as a harmonic of price. To get to pint three you go through a full gaussian of volume (dom then non dom). The trend continues and the volume oscillates. The A/D is shown as well. This is the first tough to understand paragraph.
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Maybe this is where I wonder a bit. (I do understand the usual gaussian - uptrend black rising red falling, and the r2r shifts,etc.) When going point 1 to 2 to 3, that's one price cycle and one volume gaussian, where I would think with strict P/V scoring there should be two volume cycles (in my mind that would look like B/\B R/\R). Unless the two volume cycles would only show up in an even harmonic. That might make sense, or am I way off here?

I can see you have the regularstuff down. Now you are becoming more incisive and that is cool for making money and rotating it at the right time from stock to stock. THe B/\B and R/\R if and when they appear are like hitches, stalls, and dips on traverses. They are just pauses in price movement during your hold. when they start to occur you will find that the position on the "unusual " volume display is going to be such that the particular stock is not doing as well as other heavy hitters you own. And it is possible that some stocks on the Hot list will be performing better. You compare this on the universe with respect to the "unusual" volume. when you have a situation like you mention, often you will be unloading what you own and buying what is apparently free of such flaws at the beginning of a cycle.

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For me I am always cognizant of the perice waveform components as a function of their harmonics amplitude and phase angle. There are no missing harmonics usually but there is always an emphasis on the odd or even harmonics as a result of the amplitudes. This is tough for most people to get straight.

Market pace is the most significant aspect of this. The slower the pace the more the odd harmonics dominate. The faster the pace the more the even harmonics dominate. Think of a psotagestamp curve, for example, where trading the nondominant is not usually done with two exceptions.
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There is a definite change of character in the waves during slow pace. What peaked my interest here was the idea that recognizing when the character changed you're switching harmonics and could know what to expect next.
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I am not going to be able to easily show you how the head and shoulders is odd harmonic unless I get a scope and a few signal generators. The same for even harmonic double tops. Just inmagine that because I have seen so many patterns on scopes, etc, I can also look at those scopes and see which components of circuits are messing up.
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If the opportunity presents itself, I'll bring the scope and signal generators

One thing that has stood out at times is the waveforms' peak shift, just looking at the period. For a reference point: http://en.wikipedia.org/wiki/Waveform

Imagine the triangle wave peak shifting to the right to look more like the sawtooth wave - a shift from lateral to uptrend. Then the sawtooth shifts from a right to left translation (example: 5 periods rising, 2 falling, then 2 periods rising 5 falling) Seeing the cycle shift like that would indicate a trend change and most likely have the red to red gaussian shift. It would probably be clearer if I showed it on a chart

The peak shifting is a good observation. this is a phenomena that usually occurs as a stock's P/E ratio is approaching the "leaders" in it's sector. This is a sign that the "R" is being reached in that stock's price.

When we are looking at rank of stocks we do choose the higher ones in out universe just to make more money. As R is reached we see that it is tougher to make the old R values as each cycle presents itself. While the stock still keeps being "tenured", when it is near the top P/E ratio attainable in that sector.

At this time when this is part of oyur routine, your trading will be way past the 2 1/2% a daily average and you will be heading into partial fills on each of your streams.
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Human psychology closely follows rational natural functions. the theory of large numbers is in effect and the HERD is there all of the time. the HERD follows the smart money and I front run the smart money simply by the "human nature" of price and volume movement. It is like the waveforms of psychology are "continuous functions". It is stats to be sure but for making money, the operating point of the market can only "migrate" and not anything else.
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I always appreciate hearing/reading your viewpoint. Thanks for taking the time review this.

- EZ
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Sorry I missed the post; thanks for reminding me.
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Ezzy · Feb 12, 2007

Thank you for the reply, clarified all those issues for me. Got it.
-EZ

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Backtesting

jack hershey

Ezzy