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Dear Harvey,
I did some work on trying out dynamic zones using Metastock. I tried a
variation on what TASC explained. In the article they state:
" The zones are calculated in such a way that the probability of the
indicator value rising above, or falling below, the dynamic zones is equal to
a given probability input set by the trader."
The article explained how they developed a histogram of the values for a
given look back and set the zone based on this histogram. This looked to me
like something you could do with bollinger bands if you made the (perhaps
dubious) assumption that the indicator had a normal distribution in the
loopback period.
I used bollinger bands of 1.65 standard deviations since I seem to remember
that corresponds to the 90% confidence - only 10% of the indicator values in
the lookback period should be over this line. I copied the RSI system in MS
5.1 and replaced the band 70 with the BBandTop(RSI(opt1), opt2, e,1.65) and
replaced the band 30 with
BBandBot(RSI(opt1),opt2, e, 1.65).
This seemed to improve the performance of the RSI by quite a bit compared to
a 70/30 crossover system. I found 29 day RSI, Bollinger lookback period of
55 and the
standard deviation of 1.65 to be a good combination for the S&P 500.
Some of you may want to experiment with your favorite cross over systems to
use a Bollinger Band instead of a static crossover value. This should
provide at least few hours of cheap entertainment.
Please post your results.
Terry Garrison
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