V.12:5 (218-221): The c-Test by William Eckhardt

V.12:5 (218-221): The c-Test by William Eckhardt
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The c-Test by William Eckhardt

We all know that thorough testing is the only way to determine whether a particular trading system or indicator is viable. William Eckhardt, the mathematician whose conversation with Richard Dennis helped bring about the Turtles, points out that before you spend time testing a method, you should first use a methodological test for dimensional coherency called the c-test.

In most cases, the only way to evaluate trading indicators or systems is through diligent and rigorous testing. However, there are cases in which indicators, systems or even entire approaches can be rejected on principle. A good way to root out the unworkable indicators, systems or approaches is to apply a c-test, which is a methodological test for dimensional coherency. A system can be said to be dimensionally coherent if its results do not change even though the units of measure do. The test is applied directly to the formulas or rules that define a system or indicator. If the system or indicator fails the c-test, then it will give incoherent results that cannot be trusted; however, a formula determined to be incoherent can often be modified to pass the c-test.

To determine why a coherency test is necessary, first we look at some charting procedures that we suspect may be incoherent for example, the fallacy of attaching significance to the sizes of angles on a bar chart or similar price graph. It is not that trading systems making use of angles are inferior there is such a glut of bad systems in general that it would hardly be worthwhile to identify only a few but rather, these angle-dependent trading systems are pseudo-systems, incoherent procedures disguised as algorithms.

What holds true in a particular system should hold true no matter what the measurement. Now, a change in one unit may necessitate a change in others; if you change the unit of distance, then you must make corresponding changes to the unit of area or volume. However, in price analysis, the overriding variables of price and time are so heterogeneous that a change in the scale of one may occasion no need for a change in the scale of the other. (Chart services frequently rescale the price axes of their charts while leaving the time scales the same year after year.) Clearly, then, it should be possible to change the units




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