Stocks & Commodities V. 24:11 (56-61): Entropic Analysis Of Equity Prices by Ron McEwan
Here’s a simple method that measures the disorder in equity price data.
Among the most significant (but perhaps least known to traders) technological breakthroughs of our lifetime were the ideas published in 1948 by Claude E. Shannon and Warren Weaver. Their ideas established the basic principles by which computers are capable of communicating with each other. For traders, the publication of the ideas established the mathematical framework applicable to the analysis and optimization of speculative endeavors. Further, it helped present the groundwork for another significant publication by J.L. Kelly Jr., whose concept was presented in the Bell System Technical Journal in 1956, “A New Interpretation Of Information Rate.”
Many of you may be familiar with one of their ideas specifically applying to trading, the Kelly criterion (also
referred to as the Kelly betting system). The Kelly criterion states that we should bet that fixed fraction of our stake, which maximizes growth. Another member of the Bell Labs team, Edward O. Thorp, went on to publish the well-known “beat the dealer” and “mathematics of gambling” concepts. Thorp could be referred to as the father of program trading.
All this is based on the original ideas and concepts of
applying entropy analysis to information as presented by Claude Shannon.