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David:
You get a couple of gold stars for this excellent description of these
arcane statistics, even without the pretty girls.
Back in my college days (more than a couple weeks ago) if anyone had
suggested this kind of application for statistics, I think that they would
have been laughed at. But at that time we didn't have versatile computers
and software.
Wow! Thanks!
Lionel Issen
lissen@xxxxxxxxxxxxxx
----- Original Message -----
From: "David Jennings" <davidjennings@xxxxxxxxxxxxx>
To: <metastock@xxxxxxxxxxxxx>
Sent: Friday, October 19, 2001 4:43 AM
Subject: Re: hello from a newbie - Now Lin Reg
> Sorry, this one is a life experience so will not have analogies like
Corey's
> explanation, so no pretty girls.
>
> Before I started trading on my own account, I was for some time part of
the
> management team of the trading division of a large oil company.
> Our book, would have say 3M barrels going wet overnight. These barrels
price
> against a formula which related to the individual deal. Some would price a
> few days either side of loading based upon a formula, whilst others price
> say a month after delivery. These barrels would then be onsold on a
> different price formula. Furthermore we would have a position upto say 10
M
> barrels long or short depending upon our view of the market. Right, that's
> the easy bit. If oil drops overnight as it did last night and we were long
> it's pretty straight forward to understand the net effect on our P&L.
>
> To make life simple, we would express our exposure to oil price movement
as
> n million barrels. Hence if the oil price dropped by say 0.5 USD and we
had
> an exposure of 5 M barrels, our loss would be $2.5M. Of course the
converse
> is true, but markets tend to fall faster than they rise. Thus when our
daily
> mandate to trade was signed the Chairman would signify that he was content
> that we were say 7.5 million barrels long. My experience is that the more
> senior a manager is, the more he dislikes surprises. Shareholders dislike
> surprises even more. Thus it' was important to get as good a handle as
> possible on the risk we were running at any point in time.
>
> Now the more complicated bit is products. We would have positions in
> products. as well. So we would have gasoil, fuel oil, jet etc. By way of
> example, crude oil dropped 0.5 USD, gasoline dropped 1.01 cents/gallon
last
> night. Thus we have a relationship between our gasoline position in tonnes
> and our crude oil position in barrels. Of course last nights relationship
is
> only one point on the chart, and we have many charts. What we didn't talk
> about before was the fact that markets are manipulated. Lets say, I have a
> cargo of 250,000 tonnes of fuel oil which I am selling to you at a number
> relating to the price of the close of futures market fuel oil price
tonight
> . So if I buy the Nymex close, the market will rise and I make money on
the
> physical cargo. Thus, there is error in price of the auction process.
>
> So when trying to derive our relationships for exposure, we know there is
> error in price ( & time, hence my observation on linear regression) .
Now,
> from our statistical look at the world, there will be a lot of points
which
> describe our gasoline/ crude oil price movement relationship. Some will
be
> consistent and others (a hopefully smaller number) will be just wrong.
Thus,
> we use a robust statistic which is "insensitive to small departures from
the
> idealised assumptions for which the estimator is optimised". This may be
> interpreted as either fractionally small departures for all data points
> e.g. errors in time/price of a bar or fractionally large departures in a
> small number of data points e.g. bad ticks. I'll leave the maths out, but
> I'm sure you'll spot that the problem may be described as a probability
> density function.
>
> Broadly speaking there three types of robust estimation M(maximum
> likelihood), L(linear combination) & R(rank test). M estimates are
> reasonably straight forward, as we minimise the mean absolute deviation
> rather than the mean square deviation. To actually describe solution of
> these is beyond my typing skills/e-mail. However, mathematical statistical
> text book or books on signal processing tend to be quite good in this
area.
>
> My experience was that by using these estimates rather than least squares,
I
> had a better handle on the exposure we were running, and thus felt warmer
> when asking the Chairman to sign for the risk we were running. Someday,
> probably sooner than later I'll get around to building an indicator based
on
> the robust statistic - funny how one gets ideas from an innocent
observation
> on the seeming inadequacies of a function.
>
>
>
> ----- Original Message -----
> From: "Lionel Issen" <lissen@xxxxxxxxxxxxxx>
> To: <metastock@xxxxxxxxxxxxx>
> Sent: Friday, October 19, 2001 12:01 AM
> Subject: Re: hello from a newbie - Now Lin Reg
>
>
> > David:
> > what do you mean by "the robust statistic"?
> > Lionel Issen
> > lissen@xxxxxxxxxxxxxx
> > ----- Original Message -----
> > From: "David Jennings" <davidjennings@xxxxxxxxxxxxx>
> > To: <metastock@xxxxxxxxxxxxx>
> > Sent: Thursday, October 18, 2001 4:29 PM
> > Subject: Re: hello from a newbie - Now Lin Reg
> >
> >
> > > Corey,
> > > Thanks for the reply. I like your wave analogy. I haven't used lin reg
> in
> > > Metastock, but have used it extensively elsewhere, and was surprised
> that
> > > the MetaStock implementation appeared to have no predictive capability
> > i.e.
> > > one can't explicitly look at a value say 5 bars into the future - thus
> > > thought maybe I had its particular implementation around my neck.
> > >
> > > I suspect I should given a rather longer explanation of what I was
> getting
> > > at. I was looking for an answer which was as simple as last bar on
chart
> > > based on n periods back, or the number of bars back was the same as
the
> > > number forward (less likely) or the number of bars back was set
> > implicitly.
> > > Thus, humble apologies.
> > >
> > > This prompts question, have you tried using the robust statistic? I've
> not
> > > rigorously tried it for use in smoothing price as an input to an
> > indicator,
> > > but have found that it gives superior results for volatility /EOD
> exposure
> > > calculations.
> > >
> > > Many thanks
> > >
> > > DJ.
> > > . ----- Original Message -----
> > > From: "C.S." <csaxe@xxxxxxx>
> > > To: "MetaStock List" <metastock@xxxxxxxxxxxxx>
> > > Sent: Thursday, October 18, 2001 7:29 PM
> > > Subject: Re: hello from a newbie - Now Lin Reg
> > >
> > >
> > > > David,
> > > > I will give it a try, at least how I see it. You should really go to
a
> > > > library to find a book on Basic Statistics. I have found that at
least
> a
> > > > basic grasp of statistics is essential to technical analysis so you
> can
> > > > accurately judge if one indicator or system is really "better" than
> > > another,
> > > > and by how much. It also speeds the development of an indicator
since
> > you
> > > > will have a grasp of what is really being measured and can zero in
on
> a
> > > > specific path for improvement for an indicator, rather than blindly
> > > plugging
> > > > numbers into an equation and wasting your time.
> > > >
> > > > Imagine standing at the beach and watching the waves roll in. You
find
> a
> > > > nice flat board 13 feet (periods) long, and throw it lengthwise into
> the
> > > > surf so the ends of the board extend from one wave crest to the
next.
> > The
> > > > ends of the board will slightly sink into the wave crests while the
> > middle
> > > > of the board will rise slightly above the trough between the crests.
> The
> > > > board is trying to find a true sort of average of the level of the
> ocean
> > > as
> > > > it sees it from its 13 foot (period) world.
> > > >
> > > > If the height and shape of both waves are the same, the surface of
the
> > > board
> > > > will be level. Obviously, if one wave crest is higher or broader
than
> > the
> > > > other, that end of the board will be higher than the other. The
board
> > will
> > > > be sloped from horizontal.
> > > >
> > > > If we had attached a felt-tip pen to one end of the board and let it
> > mark
> > > > the motion of the end of the board onto some paper (yeah,
waterproof),
> > we
> > > > would see the result of the movement of the end of the board as
waves
> > > moved
> > > > under it. Although linear regression uses a straight line to form
our
> > > board,
> > > > MetaStock graphs the line that would result from the end of that
board
> > as
> > > it
> > > > moves over the crests and troughs of the close of prices. If we had
> > thrown
> > > a
> > > > shorter board into the surf, it would pitch up and down and show a
> > larger
> > > > range of slope changes than the longer board. The pen attached to
the
> > > > shorter board will also more closely graph the shape of the waves.
The
> > > > analogy of the difference between a small boat and a supertanker in
a
> > > storm
> > > > could also be used.
> > > >
> > > > If the foregoing has completely confused you, just do the following:
> > > > 1. Open a chart of prices and double-click directly on the prices to
> > > change
> > > > the price style to line.
> > > >
> > > > 2. Go to Insert, and line studies, and draw a 13 period linear
> > regression
> > > > line onto the prices anywhere on the graph.
> > > >
> > > > 3. Go to Indicator Quicklist and select Linear Regression Indicator.
> Put
> > a
> > > > 13 period indicator onto the prices.
> > > >
> > > > 4. Click directly on the 13 period line study bar that you drew in
#2,
> > and
> > > > holding down the left mouse button, slide it left and right over the
> > > prices.
> > > >
> > > > 5. Cool, eh? Notice that the right end of the linear regression line
> > study
> > > > bar perfectly traces out the line that was graphed by the 13 period
> > Linear
> > > > Regression Indicator from the Quicklist.
> > > >
> > > > 6. Get back to the beach and offer a cold one to that gorgeous
blonde
> > that
> > > > helped you find the boards.
> > > >
> > > > -Corey Saxe
> > > >
> > > >
> > > >
> > >
> >
> >
> >
>
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