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Bob and Gary:
I found both of these posts very educational. I don't thoroughly understand the
high band/low band pass portion, but I think I have a feeling about what you
were trying to do. Makes me wonder why people aren't paying you two $5000 a pop
for something. At least they'd be getting quality information.
Thanks for the great posts.
Tim Morge
Bob Fulks wrote:
>
> At 9:37 AM -0600 7/7/98, Gary Fritz wrote:
> >Bob Fulks wrote:
> >> I don't know how to explain it in a short message without pictures
> >> but will try.
> >
> >Bob, thank you for an *outstanding* post. That's a wonderful
> >description of how to apply a logical and scientific approach to
> >system development, instead of the "throw some indicators at the
> >wall and see if they stick" approach. If I could, I'd like to ask for a
> >bit of expansion and clarification of some of your points:
> >
> >> characteristic in real time. In this case we are looking for a periodic
> >> component that occurs around every 10 days. So we would like to isolate
> >> this component from the other information in the price pattern to see if we
> >> can generate trading signals from it. We design a filter that passes data
> >> with a period in the range of perhaps 5 to 15 bars. I usually use
> >> combinations of various moving averages for this. (A moving average is a
> >> filter that can be used to remove periodic components with fewer than some
> >> number of bars.)
> >
> >Can you expand on this a bit? My EE filter-design classes were 20
> >years ago, and I was never very good at it. :-)
> >
> >I assume an N-period MA (do you usually use an XMA, or maybe
> >Tim Tillson's T3 because of its faster response, or...?) acts as a
> >high-pass filter to remove signals "faster" than some period X, where
> >X is probably less than N, but some specifics would be very helpful.
> >E.g. if you have a rough rule-of-thumb relating N and X, that would
> >be great. For now I just use the "plot it and see how it looks"
> >method.
>
> Since you are an EE (as am I), I will use that terminology. I use a lot of
> different filters but the T3 filter is fine for this purpose. The numbers
> in the post are a good start (5 to 15 bars period). That would be 17 to 45
> cycles per year on daily data. You need to watch the phase shift since this
> causes delays.
>
> >
> >> You can then create an indicator to plot the resulting filtered signal
> >> to compare it with the original price signal. It should be a lot
> >> smoother and have the trend removed so that it oscillates around
> >> the zero line. Many common oscillators such as MACD have
> >> a similar structure and use similar moving average filters.
> >
> >So do you use something like MACD's MA(fast)-MA(slow) to remove
> >the trend? Presumably with the slow MA set to a period long enough
> >that it removes the oscillations of the signal you're interested in,
> >i.e. so MA(fast) contains the signal but MA(slow) doesn't?
>
> The high-pass filter will remove the trend (DC component) and the low-pass
> filter will remove the high-frequency noise (to the extent of the cut-off
> rate of the filters). I do not use MACD. I was referring to the fact that
> MACD also uses filters in a similar way. Sorry it wasn't clear.
>
> >
> >E.g. as a first experiment I tried plotting
> > Xaverage(High,5) -XAverage(High,15) on a daily SPX chart,
> >and it does a reasonably good job of isolating the tops -- and the
> >bottoms too, since the swing bottoms tend to have low highs.
>
> This is fine but the XAverage filter has a cutoff rate of only 20 db per
> decade which is pretty slow. T3 may be better. Avoid using filters with
> lots of poles and zeros - they have weird phase behavior.
>
> >
> >> Ideally, the tops and bottoms of our resulting
> >> signal will occur at or near the same bars as the tops and bottoms of the
> >> ShowMe we created above. We can test this with correlation functions and
> >> adjust the characteristic of the filters so that we get good correlation of
> >> tops and bottoms.
> >
> >Can you explain exactly what you mean by correlation functions?
>
> You can run correlations between the price series and the trading signal to
> maximize the correlation as you adjust the parameters of the filters. The
> objective is to have the two line up in time.
>
> >
> >> Now we need to generate signals near the tops
> >> and bottoms of our trading signal.
> >> Simple things such as:
> >> if Sig > Sig[1] then buy
> >> if Sig < Sig[1] then sell
> >> work pretty well but lag a little. Let's use
> >> this in our example.
> >
> >The lag is a problem with many indicators, and turns many good
> >indicators into money-losers. Do you know of a good (safe,
> >reliable) way to anticipate the turn in the indicator and get aboard
> >the move at the start?
>
> The above would trade the first bar that the signal changed direction.
> Depending on the entry technique, MOC, market order, etc., you might want
> this for entries - a little later but surer. An exit before the top of the
> signal might be better to avoid giving back some of the gains.
>
> >
> >> Now we probably get too many unprofitable trades. For example, we probably
> >> want to trade only with the trend (when the trend is up, we want to go long
> >> and flat, when the trend is down, we want to go short and flat, and when
> >> the trend is flat, we may want to go both long and short). So we need a way
> >> to determine the trend. (There are lots of ways to do this, none perfect.)
> >> So we then use a trend signal to filter out trades. Assuming a Trend
> >> function that returns values: up = 1, down = -1, and no trend = 0
> >
> >I want that Trend function!! :-) I've been trying to find a good
> >indicator of trend, *especially* one that detects a no-trend condition.
> >I (and probably most other system developers) could vastly increase
> >the profitability of my systems if I could figure out how to keep them
> >out of the market in flat periods -- or, better yet, switch to a range-
> >trading strategy when the market flattens.
> >
> >Obviously the Trend function would need to be tunable for different
> >measures of trend (e.g. are you interested in the 10-day SPX
> >period or a longer 2-month super-period?), but that should be
> >do-able.
> >
> >I'm sure none are perfect, but I'd appreciate some pointers if you
> >know of some good trend indicators.
> >
>
> I've tried multiple length moving averages (price above all is uptrend,
> etc.), consecutively higher swing high bars, etc., and about everything
> else I can think of. As I said, none are perfect. I keep looking.
>
> >Again, thanks for an excellent post!
>
> Glad you liked it.
>
> Bob Fulks
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