Good Morning,
Over the past few months there have been a
few comments regarding 2nd 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 2/3rds of 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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