RE: [EquisMetaStock Group] Sigma Bands, MetaStock Email Archive

Steve:

As usual you are right on target.

Lionel

From: equismetastock@ yahoogroups. com [mailto:equismetast ock@xxxxxxxxxxxx com] On Behalf Of Steve Karnish
Sent: Thursday, July 17, 2008 11:26 AM
To: equismetastock@ yahoogroups. com
Subject: Re: [EquisMetaStock Group] Sigma Bands

Cam,

Can't help from a formula perspective. ..but, keep this in mind: For years, I used an eight period Standard Error Band. By chance, I stumbled on to some work posted about Forex that was using BB Bands. I quickly discovered that substituting the SEBs for the BBs, I got much better testing results. Since that time, I am now using SEB in the range of 50-120 days. This is a far cry from eight!

My point is that way too much is made out of "exacting" and duplicating a formula or trying to replicate system rules to a tee. Allow common sense and your technical ability to improve on what has been written. You might be twice as good a trader than the author. Gee, Lind-Waldock, Chicago Merc and others have published articles that I have penned (and I'm a total "nobody"). It does not mean that I am a dragon slayer. It does mean that I am willing to share an approach that has merit.

Remember, the markets are dynamic and that changes in volatility are the biggerst system "killas". Fit all approaches to current conditions. Don't ever get stubborn. Always, put your spin on various approaches and I think you will have more confidence when putting them into play. Btw, I'm sure that your math education exceeds the average trader's. I hope you find the answer your questions.

Take care,

Steve

--- On Thu, 7/17/08, Cameron Reid <cwr_74@xxxxxxxx com> wrote:

From: Cameron Reid <cwr_74@xxxxxxxx com>
Subject: [EquisMetaStock Group] Sigma Bands
To: "equismetastock@ yahoogroups. com" <equismetastock@ yahoogroups. com>
Date: Thursday, July 17, 2008, 9:53 AM

Good Morning,

Over the past few months there have been a few comments regarding 2^nd order polynomials (parabolas) as a means to approximate the price curve and sigma bands as a way to measure the chances of a stock moving higher. I was able to find a graphic example of this at http://sigmabands. blogspot. com/ . According to the author / blogger the center line in based on 250 bars worth of data and the sigma bands are each spaced one standard deviation apart. I am assuming that the standard deviation data is also based on 250 bars, although this is not mentioned specifically.

What I thought was quite interesting / impressive about these examples is that, visually, it appears that the price series does spend roughly 2/3^rdsof the time within the first sigma bands and roughly 2% of the time outside the third sigma bands. Exactly what you would like to see. Bollinger Bands, to me, have never shown this level of consistency.

I purchased Umits Trend Toolbox (I have no financial interest in this product at all) so that I could plot a second order polynomial fitted to the price curve. This curve on my charts was the same shape as the those on the web site, but roughly 10 pts or 1% higher; not really a big deal. Where my efforts began to stumble was with the Sigma bands.

To get the sigma bands equally spaced at all point I used to following construction:

SD:= LastValue(Stdev( C,60));

And then I added / subtracted this value to / from the centre line to create my first sigma bands.

As an aside, I am thinking about this to smooth out the Standard Deviation value:

SD:= LastValue(Mov( 20,Stdev( C,60),s);

The key difference is that my standard deviation value on the S&P 500 is near 80 and the website lists theirs at 25. Iʼm off by a mile. Additionally, as you would assume, nearly 100% of prices are within the first standard deviation; this should not be the case. This pattern repeated itself on a number of individual stocks that I tested this on.

Perhaps someone who has a better grasp of statistics might be willing to share why Metastockʼs Stdev value is so significantly different?

I know that I could fix this by just dividing the value by some number between 2 and 3; however, this is not very satisfying.

Also, I am looking at testing an long exit strategy whereby trades are closed when the 60-day parabola makes itʼs first move down.

Cheers,

Cameron

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