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.

2 comments:

Brandon Wilhite said...

I'll probably try this out for Fx also but...how much do you think the volume contributes to the accuracy of this type of indicator? (Since I don't really have volume in spot Fx, I'm always wondering this.)

BW

Brett Steenbarger, Ph.D. said...

Hi Brandon,

I think the concept of correlating price and volatility should be feasible with FX, without needing volume calculations. Feel free to contact me via email for possible pointers. Thanks--

Brett