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To all,
I'm still a newbie on Metastock and have been reading up on
Correlation Analysis. I really appreciate everyone's help in the
past. I would like to get everyone's opinion that has used
correlation. It seems to me that if you compare the correlation of
an independent variable (an indicator) against a dependent variable
(a stock's closing price) and receive a positive correlation, you
should have a leading indicator. Therefore, if you have a leading
indicator, you may have a system or part of a system.
In this simple system test:
Correl(MACD(),CLOSE,5,10)>0.90
AND MACD()<0
AND MACD()>Ref(MACD(),-1)
you look to see if there's a positive (greater than 0.9) correlation
between MACD() and the closing price, that MACD() is less than 0, and
that MACD() is increasing. If all of these things agree, you enter
long. Do the reverse to exit long.
The Metastock manual does not get in-depth in its discussion about
the PERIODS and SHIFT. Let's say, I wanted to maximize my profits
within 20 days. Should I set the SHIFT to 20? Does anyone know the
effect the results have when you increase or decrease the period and
shift? I've performed the above changes, but I'm not sure how to
interpret the results when I start changing numbers. I don't want to
just 'optimize' something I don't fully understand or 'optimize'
something for the sake of optimizing.
Increasing the SHIFT seems to put alot of uncertainty into the
correlation - it starts decreasing. This may be the result of the
farther you look into the future, the more unlikely your prediction
will be. Is this a correct interpretation? Should SHIFT always be
set between, say, 1 and 3 ?
Increasing the PERIODS seems to smooth out the line (if plotted as an
indicator), but what does it actually smooth? This is where I'm
losing it. Does it mean that if PERIODS is set high (eg. 50 to
smooth it over a long term) , the stock is following a long term
upward trend, and the indicator is following an upward trend, then
the correlation should be close to 1 because it is smoothing a result
that coincides with the price increase?
Correlation, to me, seems to validate or invalidate an indicator
and/or system test. Because of this, I 'think' it's a great tool to
use in TA.
Something to think about: Only use indicators in a system test when
they report a positive correlation to price. What do you think?
Your help is greatly appreciated!
Later,
/\/\ichael Salvucci
salvucci@xxxxxxxx
Lawrenceburg, Tennessee USA
http://www.public.usit.net/salvucci/index.html
ICQ User Number 1035286 via http://www.mirabilis.com
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