Thursday, August 6, 2015

Simple Chaos Indicator

This article - Using a Self-Similarity Metric with Intraday Data to Define Market Regimes - inspired me to develop my own "chaos indicator".

I take two months (42 trading days) window and calculate:

ChannelWidth1 = high-low for the whole window.
ChannelWidth2 = average daily high-low inside the window.
Ratio = ln(ChannelWidth2/ChannelWidth1).

To make it a mean-reverting indicator, I calculate:

CHAOS = MA(Ratio, 126) - MA(Ratio, 512), where MA denotes moving average.

Here's how it looks for SPY:

What I can see comparing these charts is that sharp declines of CHAOS definitely correspond to fast upsides. I'm not sure about rising CHAOS, I can see various scenarios how it happened.

What's most interesting about this indicator - its current value! Being stuck on one SPY level for so long drives CHAOS to historical heights. Do we have any choice to get down from there except for the sharp decline? Do we have a SPY surge ahead?

No comments:

Post a Comment