Cumulants are statistical measures of correlation designed to go to zero whenever any one or more quantities under study become statistically independent of the rest. Cumulants generalize the concept of a correlation measure; in particular, a correlation of two bodies, quantities and so on, the most intuitive one, can be represented and measured by the second-order cumulant. Higher orders can be conceived.
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High order cumulants
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August 30 2010, 7:30pm | Comments »
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Introducing Heidi, the hour-scale predictive model
ForexAutomaton has just expanded its portfolio of free predictive models into higher frequency domain. From now on, a forex forecast of low, high and close for the next hour will be posted on this site every 60 minutes. The new system is named Heidi following the naming convention where first names starting with H are assigned to systems with hourly decision-making scale.
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August 11 2010, 2:39pm | Comments »
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Explaining the output of Heidi trading system
This document explains typical output of Heidi -- an experimental free (payless but closed-source) ForexAutomaton hour-scale forex forecasting system or predictive model.
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August 9 2010, 2:04pm | Comments »
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Temporal distribution of GBP/JPY low and high during a day
GBP/JPY, CHF/JPY and AUD/JPY seem to fall in the same group as far as the temporal distributions for high and low are concerned. The most likely time for the day's high and low to be made in these currency pairs is the early hours of the day (Central European time), reflecting morning activity in Japan.
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August 4 2010, 4:27pm | Comments »
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July performance review for Danica-9am algorithmic system
During the month of July, the seventh month of live performance, the system continued on the auto-pilot without code upgrades or parameter changes. This document consists of a summary section reporting the figures of merit for the forecasting quality, followed by 14 subsections, dedicated to the individual exchange rates tracked by the system. Those contain our usual green-yellow-blue-red color-coded charts of the performance (2 for the two hypothetic strategy triggers for each currency pair, 28 in total) and details pertinent to the specific currency pairs. For comparison with the previous month, you may want to take a look at the June review.
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August 2 2010, 5:32pm | Comments »
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Revisiting the Day Range Strategy. Part 2.
This report continues our efforts to document the progress in the Day Range Strategy as the strategy is on its way towards production version. The research version of our system, known as Danica, has demonstrated in the six months of live operation that the high degree of predictability for daily extremes (low and high) is a reality, not a backtesting artefact. The Day Range Strategy is designed to benefit from the high stability of forecasts for daily extremes while minimizing the exposure to the forecast of daily close, by placing a protective stop and a profit target.
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July 6 2010, 6:02pm | Comments »
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June performance review for Danica-9am algorithmic system
During the month of June, the sixth month of live performance, the system went through a major upgrade. The upgrade is expected to further improve prediction quality for daily high and low (as measured by Pearson correlation coefficients between predicted and actual logarithmic returns) while its effect on the prediction quality for daily close is uncertain. This document consists of a summary section followed by 14 subsections, dedicated to the individual exchange rates tracked by the system. Those contain color-coded charts of the performance and details pertinent to the specific currency pairs. For comparison with the previous month, you may want to take a look at the May review.
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July 1 2010, 7:48pm | Comments »
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Temporal patterns and history of EUR/JPY spread, 2003-2009
This third article in a series dedicated to patterns and stability of forex spread deals with EUR/JPY. As in other studies, the data come from a popular non-ECN broker. The only surprise here is the unexpected increse of the spread in 2009, both on absolute scale and in relation to the EUR/JPY quote.
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June 23 2010, 4:39pm | Comments »
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Revisiting the Day Range Strategy. Part 1.
One of conclusions of the previous strategy research report was that one has to find a way to benefit from the high stability of quality forecasts for daily extremes (high and low) while minimizing the exposure to the forecast of daily close. One way to do that is trading with the profit target on the basis of forecasts for daily extreme levels (high and low) alone. This report begins a series dedicated to just such a strategy. The research will culminate in a launch of a new model trading system (this time with a trade signal and a simulated portfolio of some sort!) which will complement Danica.
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June 16 2010, 6:52pm | Comments »
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USD/JPY spread patterns and history, 2003-2009
This second article in a series dedicated to patterns and stability of forex spread deals with USD/JPY. In this pair, one of the most liquid in forex, spread is seen to be quantitatively very close to USD/JPY; its evolution during the day and week is also similar.
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June 14 2010, 7:06pm | Comments »
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EUR/USD spread patterns and history, 2003-2009
This article begins a series dedicated to forex spread (to be defined below as half the difference between bid and ask prices). In the series, a separate article will be dedicated to every forex pair we track. The issues of interest are evolution of spread in time, stability of spread during the day and week, and existence of predictable patterns in spread. Data from a popular non-ECN broker are used.
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June 8 2010, 2:52pm | Comments »
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May performance review for Danica-9am algorithmic system
During the month of May, the fifth month of live performance, the system kept running on complete autopilot, with no code upgrades or parameter changes. This document consists of a summary section followed by 14 subsections, dedicated to the individual exchange rates tracked by the system. Those contain color-coded charts of the performance and details pertinent to the specific currency pairs. For comparison with the previous month, you may want to take a look at April review.
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June 1 2010, 5:48pm | Comments »
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Temporal distribution of CHF/JPY low and high during a day
CHF/JPY resembles AUD/JPY in that its temporal distributions for high and low are heavily dominated by the early hours of the day (Central European time), reflecting morning activity in Japan.
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May 31 2010, 11:26am | Comments »
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Temporal (in)stability of trading system optimization curves
For the first time, I address the question of how stable the optimization results are in time. While predictabilities of daily high and low show a highly stable pattern of dependence on the parameter subject to optimization, the positive results for close are mainly due to the high impact of a single period, which happens to cover the financial panic of the last quarter of 2008.
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May 21 2010, 12:52pm | Comments »
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Kelly position sizing with a fixed stop-loss; dangers of tight stop-loss
The main conclusion of the previous article was that a strategy with a position size distributed proportionally to the Kelly Criterion was found to be more attractive than the strategy were potential stop-loss would be distributed according to Kelly. A way to implement such a better strategy was understood to consist in fixing the stop-loss distance while having the position size proportional to Kelly allocation. For that, one would need to optimize the stop-loss distance. Here comes the promised development, improving the histogramming technique used to judge the "attractiveness" of a strategy, and elaborating on the choice of the stop-loss.
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May 13 2010, 6:44pm | Comments »
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April performance review for Danica-9am algorithmic system
During the month of April, the fourth month of live performance, the system kept running on complete autopilot, with no code upgrades or parameter changes. This document consists of a summary section followed by 14 subsections, dedicated to the individual exchange rates tracked by the system. Those contain color-coded charts of the performance and details pertinent to the specific currency pairs. For comparison with the previous month, you may want to take a look at March review.
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May 4 2010, 7:03pm | Comments »
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Forex position sizing and Kelly Criterion
I compare four different position sizing strategies to use in algorithmic trading with Danica forecasting system. Two of them incorporate Kelly Criterion information. It seems that the strategy I have been using so far has been a sub-optimal one; a way to proceed is discussed.
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April 28 2010, 7:44pm | Comments »
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Temporal distribution of AUD/JPY low and high during a day
AUD/JPY is the first entirely Asia-Pacific currency pair looked at with this approach so far. You can see the difference with other pairs, as the temporal distributions for high and low are heavily dominated by the early hours of the day (Central European time).
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April 22 2010, 6:57pm | Comments »
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Kelly capital allocations seem to favor "animal spirits"
If you are following Danica trading system updates, you must have seen the table of Kelly capital allocations. These are estimates of the capital allocations to trades which, according to the theory of J.Kelly, maximize the speed of capital growth and are tuned to the historical success rate of the insight (forecasts in our case) on which the trading is based. According to Kelly, the rate of capital growth is maximized by having the allocation of capital to outcomes, given the forecast, match the probability distribution of those outcomes, given the forecast. The implementation of Kelly approach therefore is based on data base requests with specific selection conditions. Kelly allocations would, with enough data, converge to zero if darts throwing is used to make decisions. Same outcome would ensue if the real markets were replaced by hypothetic efficient markets of the academic finance. In this post I present and discuss a more complete version of a table, including negative allocations, some of which seem to apply consistently to a particular class of trades.
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April 19 2010, 10:42am | Comments »
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Distribution of USD/CHF daily high and low during a day
The pattern of daily lows and highs for USD/CHF is not too different from EUR/USD and GBP/USD. This study is added for the sake of completeness.
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April 15 2010, 3:07pm | Comments »