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> I've been playing with Clyde's entropy indicator - the one with the bust.
>
> I don't understand the theory behind entropy, or how the indicator was
> written.
As Bob Fulks pointed out, the indicator with the bust is just measuring
how far the price is above/below a moving average.
As a general point, I think it's important to understand what an
indicator is measuring if you are going to use it. They are all just
different ways of looking at the price or volume or whatever.
Personally, I don't use any except as a research tool to help me
visualize what my code is doing when I'm trying to turn an idea into a
system.
I've seen a number of "new" indicators on lists recently that are just
variations on this theme of measuring how far the price is from an
average. When you reduce the math down, they turn out to be a different
way of looking at old favorites. "How far" can be expressed several
different ways: a percentage of price, a number of true ranges, a number
of standard deviations, etc. There is more than one way to display the
results as well. The two most familiar are bands or channels overlaid on
the price and as a separate oscillator displayed below the price. The
oscillator can be scaled in many different ways: 0 to 100, +/- 100,
+/- the raw number, whatever.
So, taking my "how far" examples one at a time....
Percent of price
Channels: Price Envelopes (example, plot .9*average and 1.1*average).
Oscillator: Clyde's bust code (plot the percentage the price is
above/below the average)
Average true range
Channels: Keltner Channels (example, plot the average +/- 2 ATR).
Oscillator: Plot the number of ATRs the price is above/below the
average.
Standard deviation
Channels: Bollinger Bands (example, plot the average +/- 2 std dev).
Oscillator: Plot the number of std dev the price is above/below the
average.
Hope this helps.
--
Dennis
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