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Al,
The R2 indicator measures how closely prices follow a linear regression
trendline. This indicates the strength of the trend...the more closely
prices move in a linear relationship with the passing of time, the
stronger the trend.
It is helpful to consider the R2 in relation to linear regression slope.
While linear regression slope gives you the general direction of the
trend ( whether positive or negative ) , R2 gives you the strength of
the trend. A high R2 value can be associated with a high positive or
negative linear regression slope.
Although it is useful to know the R2 value, ideally, you should use R2
in tandem with linear regression slope. High R2 values accompanied by a
large linear regression slope value are of most interest to traders.
There is more.....if you want
*********************************************************
Answering your questions:
1. Yes. to the first part....2nd part you are correlating the close to
the close nPeriods ago.( only 2 data points )
example, load into indicator builder:
R_Squared= Correlation(Cum(1),C,5)^2;
R2=Correlation(C,Ref(C,-5),5)^2;
Plot(r_squared,"r_squared",colorRed,styleLine);
Plot(r2,"r2",colorYellow,styleLine);
2. Yes , I am correlating the closing price of the NDX to the closing
price of "whatever ticker", over n Periods.
Which will tell me how closely the " whatever ticker" is following
the price movement of the NDX. therefore, this
might be one way to locate stocks to trade...the higher the R2
value the more closely the ticker is following the NDX
and the lower the R2 value the more the ticker is moving in the
opposite direction ...
example...select QQQ's as your ticker....and load the following into
indicator builder...since the QQQ's track the NDX there will be a high
R2 value....
/***Base Market************/
Mkt="^ndx";//Must be enclosed in "....."Quotations.
P=Foreign(Mkt,"C",1);
/**************************/
Periods=14;//Set the period of Observation
/***R-Squared*****************/
R2=Correlation(P,C,Periods)^2;
/*****************************/
Anthony
Avcinci wrote:
> Anthony, What I was doing was simply citing what the help file gave as
> an example of using the correlation function to establish a trend of
> closing prices over a period of time. Your explanation probably
> reflects my poor understanding of the cum(1) function. When you write
> R2 = Correlation(cum(1),C,14)^2, does this mean you are correlating
> all the closing prices over the last 14 days (in other words, closing
> price as a function of time)? If so, how does this statement differ
> from R2 = Correlation(C,ref(C,-pds),pds)^2? In your next R2 statement,
> you wrote R2 = (P, C, periods)^2, where P had been assigned to the
> closing price of the NDX index. So, it looks like you are correlating
> the price of the index with the closing price of something else. I
> don't know what all the other stuff about alpha and beta have to do
> with that. I guess I'm having difficulty understanding your second R2
> statement. Can you enlighten me a bit? Thanks a lot. AV
>
> ----- Original Message -----
> From: Anthony Faragasso
> To: amibroker@xxxxxxxxxxxxxxx
> Sent: Friday, February 14, 2003 8:49 PM
> Subject: Re: [amibroker] r-squared and regression analysis
> Al,
>
> Here is Metastocks:
>
> The following is the formula for Metastocks r-squared:
> r_squared =Pwr(Corr(Cum(1),C,14,0),2)
>
> AFL Translation:
>
> R_squared=correlation(cum(1),C,14)^2;
>
> ********************************************
>
> The formula I posted is from my Alpha and Beta indicators
> located in the
> library.
> http://www.amibroker.com/library/formula.php?id=157
>
> //Alpha AND Beta Indicators
> //Ver.1.00, 2/10/02
> //coded by Anthony Faragasso
> //e-mail: ajf1111@xxxxxxxx
>
> //Insert your Stock_index,Composite_index, S&P,etc.
> //as the **Base Market**.
>
> MaxGraph=5;
>
> /***Base Market************/
> Mkt="^ndx";//Must be enclosed in "....."Quotations.
> P=Foreign(Mkt,"C",1);
> /**************************/
>
> Periods=14;//Set the period of Observation
>
> //****Beta***********************/
>
> Beta=(( Periods * Sum(ROC( C,1) * ROC(P,1),Periods )) -
> (Sum(ROC(C,1),Periods) * Sum(ROC( P,1),Periods))) /
> ((Periods *
> Sum((ROC(P,1)^2 ),Periods)) - (Sum(ROC(P,1 ),Periods)^2 ));
> /******************************************/
>
> //*****Alpha*********************/
>
> Alpha=(Sum(ROC( C,1) ,Periods) - ( Beta ) * Sum( ROC( P,1)
> ,Periods ) )
> / Periods;
> /******************************************/
>
> /***R-Squared*****************/
> R2=Correlation(P,C,Periods)^2;
> /************************************/
> Graph0=Beta;
> Graph0Style=1;
> Graph1=Alpha;
>
> /Graph1=(LastValue(Highest(Graph0))/LastValue(Highest(Graph1)))
> *
> Graph1;
> Graph1Style=1;
>
> /**R_squared graphing*****/
> Graph2=r2;
> Graph2Style=1;
> Graph2Color=7;
> /*************************/
> Title=Name()+" "+"ALPHA
>
> +EncodeColor(colorBlue)+"("+WriteVal(Alpha,format=1.2)+")"+"
>
> "+EncodeColor(colorBlack)+" BETA
> "+EncodeColor(colorRed)+"("+WriteVal(Beta,format=1.2)+")"+"
> "+EncodeColor(colorBlack)+" R_SQUARED
> "+EncodeColor(colorYellow)+"("+WriteVal(r2,format=1.2)+")";
>
> /**Notes***/
> //You've got to start with r-squared, which is an
> //indicator of the validity of the beta AND alpha
> //measures. Because the r-squared measures just how
> //closely the Stock OR fund tracks the
> //index with which it is being compared.
>
> //An r-squared of 1.0 indicates
> //A perfect match. AND, in that case, you can
> //trust that the beta AND alpha measures are
> //valid, too. But, the lower the r-squared, the less
> //reliable beta AND alpha measures are.
>
> //"[Betas and alphas on] a Stock or fund with an r-squared
> that's below
> //0.50 are completely meaningless.
>
> //Assuming the r-squared is, say, 0.75 OR higher, you can
> move on to the
> //beta.
>
>
>
> Avcinci wrote:
>
> > Anthony, Shouldn't it be: R2 = Correlation(P,
> > ref(P,-periods),periods)^2; ? Al V.
> >
> > ----- Original Message -----
> > From: Anthony Faragasso
> > To: amibroker@xxxxxxxxxxxxxxx
> > Sent: Friday, February 14, 2003 8:10 PM
> > Subject: Re: [amibroker] r-squared and regression
> analysis
> > /***Base Market************/
> > Mkt="^ndx";//Must be enclosed in "....."Quotations.
> > P=Foreign(Mkt,"C",1);//Base market
> >
> > Periods=14;//Set the period of Observation
> >
> > /***R-Squared*****************/
> > R2=Correlation(P,C,Periods)^2;
> >
> >
> >
> > "sidleysh " wrote:
> >
> > > Does anyone know how to construct r-squared in AB?
> There
> > is an r-
> > > squared function in MetaStock, and I desperately
> need it
> > to construct
> > > and adaptive MA based on the AT3 from T&A
> > >
> > >
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