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Rolling Versus Anchored Indicators

December 15, 2009

A quick and important note about what we have done and where we are going with our indicators. So far all of the indicators we have produced are “rolling indicators” and in the new year we will be putting out a new series of “anchored indicators.” What is the difference? A rolling indicator like the DV2 or RSI2 or even moving averages constantly move forward and the reference points that it uses change as time moves on. This has the advantage of adjusting to new environments, however the major disadvantage is the loss of context for what has happened. As an example, the RSI2 primarily looks at what has happened over the last two days, and whether the market is up 20% or down 20% over the previous month is not factored in to the calculation.  Furthermore the element of time is missing: how long has the RSI2 been at or below a given level–clearly if the RSI2 is under 30 for 4 days, that is more informative than the RSI2 being under 30 for 1 day even with equivalent RSI2 values. That is why in 2010, I will be focusing my efforts on “anchored” indicators that have some type of fixed reference point. Anchored indicators can factor in how much was lost or won since a given trade entry, or how much time has elapsed. These are critical points of information as the best traders use this type of contextual analysis instinctively while standard indicators completely ignore this type of data. The combination of rolling and anchored indicators make for a much more robust combination, and bring quantitative technical analysis closer to the best human experts.

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