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It seems that the more complicated a person can make something, the more faith
they seem to have in it. I have found that simple is best and easiest to
maintain and trade. If it isn't simple enough to see and you can't do the
numbers in your head, it might be too complicated. Ira.
Ronald McEwan wrote:
> I have been working on ways to identify the individual characteristics of
> tradable securities (stocks and indexes). With all that has been said
> about distribution of prices and price changes, I think much of this
> amounts to over generalizations. I think each security has it's own
> unique identity, like a set of fingerprints. Only with securities the
> fingerprints can change over time. So it is important to monitor the
> changes if we want our systems to continue to perform well. First I
> compared the curves of a normal Gaussian distribution (based on the mean
> and standard deviation of its daily returns) with the actual distribution
> of the daily returns. In this example I used CSCO (for the last 100
> days). CSCO has a unique pattern of its actual 100 daily returns versus
> the expected normal distribution curve. It spent more time then expected
> trading up and down approximately 5%. And it trades up and down 10% more
> times then the normal curve would predict. I use the normal curve as a
> comparison because the Black Scholes model is based on a normal
> distribution curve. This analysis helps to explain the "Volatility Smile"
> where out of the money options can sometimes be priced higher then the
> Black Scholes model would predict. More importantly I wanted to see what
> happens to CSCO when these "more then expected" events happen. As you can
> see from the chart these events signal significant changes in the
> direction and magnitude of CSCO's price changes. As I mentioned the
> purpose of this was to identify the particular "fingerprints" of a
> security in able to apply a suitable trading strategy and as a filter for
> picking securities to trade.
>
> Ron McEwan.
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