Saturday, December 29, 2007
A Look at Short-Term Trending: Power Measure
My Power Measure began as a moving correlation function relating price change to volume and volatility. The goal was to capture "trendiness" as a variable. I've since refined the measure (recalibrated and smoothed it) and extended it to a variety of time frames. I've found that some of the best trading opportunities occur when we see concurrent shifts in trendiness at multiple time frames.
Trends at larger time frames can be detected by noting trendiness peaks at lower price highs (downtrend) and trendiness valleys at higher price lows (uptrend). While the specifics of the latest iteration of this indicator remain proprietary at this juncture, the key idea is quite replicable: to identify occasions in which volatility is expanding in the direction of a price move. Moving correlations are excellent ways to capture this dynamic graphically.