Stocks & Commodities V. 31:11 (28–33): The Repeated Median Velocity Strategy, Part 1 by Dennis Meyers, PhD
Product Description
The Repeated Median Velocity Strategy, Part 1 by Dennis Meyers, PhD
There’s More To It Than Luck
It sounds complicated, but it’s actually simple. In this first part of a twopart
series, find out how to use this strategy to place buy & sell orders as well as the
best way to test the strategy.
In a May 1998 Stocks & Commodities
article, I examined
a trading system that used the velocity
of prices fit by a leastsquares straight
line through N past prices to determine
buy & sell points. The reasoning behind
this type of system was to only
trade when the straightline slope or
velocity was above a certain threshold.
Oftentimes, during the day, prices
meander without a notable trend.
When prices move around like that,
we don’t want to trade because of the
whipsaw losses that can occur from
this type of price action. When a price
trend finally begins, the velocity of
that price trend moves above some
minimum threshold value. Thus, the
velocity system would only issue a
trade when certain velocity barriers
were crossed.
The leastsquares polynomial is
determined by minimizing the sum
of the squares of the difference between
N prices and the value of the
polynomial line:
******
This mathematical technique has an
exact solution that dates back to mathematician
and scientist Carl Friedrich
Gauss in the 1800s.
The point of breakdown
Recently, a lot of work has been done
in what is called robust regression and
outlier detection techniques. Robust
regression techniques are now defined
by a measure called the breakdown
point. The breakdown point is loosely
defined as the smallest amount of bad
data points that can cause the regression
coefficient solutions to take on
values some distance from their true
values. Unfortunately, the leastsquares
technique has a breakdown
point of 1/N. In other words, just one bad data point can significantly change the computation of the velocity or slope
of a straight line. The median of a set of numbers has a breakdown point of
50%. This is because when 50% of the numbers are bad, then there is no way
of telling which are the bad numbers and which are the good numbers. The
highest breakdown point is 50%.
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