Dekalog Blog is an interesting site where the author, Dekalog, attempts to develop new and unique ways to apply quantitative analysis to trading. In a recent post, he discussed using the concept of Brownian Motion in a way that would create bands around a chart’s closing prices. Those bands would represent non-trending periods, and a trader could identify any time the price was outside the bands as a trending period.
At the root of most every trend following trading system is a way to define a trends existence and determine its direction. Using Dekalog’s Brownian Motion idea as the root of a system might be a unique way to identify trends and extract profits from markets through those trends.
Here is how Dekalog explains his concept:
The basic premise, taken from Brownian motion, is that the natural log of price changes, 平均, at a rate proportional to the square root of time.
Take, たとえば, a period of 5 leading up to the “current bar.” If we take a 5 period simple moving average of the absolute differences of the log of prices over this period, we get a value for the average 1 bar price movement over this period.
This value is then multiplied by the square root of 5 and added to and subtracted from the price 5 days ago to get an upper and lower bound for the current bar.
He then applies these upper and lower bounds to the chart:
If the current bar lies between the bounds, we say that price movement over the last 5 periods is consistent with Brownian motion and declare an absence of trend, すなわち. a sideways market.
If the current bar lies outside the bounds, we declare that price movement over the last 5 bars is not consistent with Brownian motion and that a trend is in force, either up or down depending on which bound the current bar is beyond.
Dekalog also believes this concept could have value beyond just being an indicator:
It is easy to imagine many uses for this in terms of indicator creation, but I intend to use the bounds to assign a score of price randomness/trendiness over various combined periods to assign price movement to bins for subsequent Monte Carlo creation of synthetic price series.