Chaos Barometer. Chaos Measurement Oscillator for Financial Markets.

Transcription

1 Chaos Barometer Chaos Measurement Oscillator for Financial Markets 6/4/2015

2 Table of contents 1 Chaos Barometer Defined Functionality 2 2 Chaos Barometer Trend 4 3 Chaos Barometer Excess 6 4 Trading Strategy 9 5 Chaos Barometer of the Market Equilibrium 11 Quant Trade Technologies, Inc. June 9, /14

3 1 Chaos Barometer Defined Functionality Chaos Barometer (CB) is a completely new type of technical oscillator based on direct measurement of chaos associated with a given market state. It works on a balance of empiric fractal dimension associated with price oscillations on any given market. Chaos Barometer is equally suitable for trading all market instruments including (but not limited to) stocks, commodities, derivatives and options. Chaos Barometer makes no assumptions about the functional representation of the underlying price oscillations. For this reason, it stands completely alone from all known market indicators, both in the realms of classical technical analysis as well as in advanced artificial intelligence based on digital filtering and neural networks. Due to its unique calculation method, the system is ideal as a hedging factor in any existing trading strategy mitigating its existing risks based on an alternative interpretation of information. Quant Trade Technologies, Inc. June 9, /14

4 This dynamic trading tool is equally efficient acting as a standalone trading strategy, when traded according to prevailed intensity of chaos in trending markets. Of course, the end user can apply their tailored money management techniques aligned with their preset stops and profit targets to suit their level of risk. Chaos Barometer is a perfect complement to fundamental traders that analyze a number of markets wishing to improve their entry and exit positions; this package can also enhance the technical strategist s market approach as well. Quant Trade Technologies, Inc. June 9, /14

5 2 Chaos Barometer Trend Trading with Chaos Barometer is remarkably simple. Add indicator named Chaos Barometer Trend to your chart. You will see the oscillator fluctuating in a range between zero and one. The closer to zero the barometer is, the stronger the trend is. Quant Trade Technologies, Inc. June 9, /14

6 The direction of a prevailing trend is indicated by the color. Red indicates a prevailing down trend, while green suggests a prevailing up trend. Normally, indicators for both price directions appear combined into one cumulative indicator showing the prevailing trend only. However, you can choose showing them both alongside to compare the intensity of uptrend against down trend explicitly. This would be at the user s discretion. Appearance can be switched with ShowLead setting, which is by default set to True. If you change this setting to False, both trend oscillators will show up. Below you can see the same symbol and time frame as above but with two trends shown individually. Quant Trade Technologies, Inc. June 9, /14

7 3 Chaos Barometer Excess The difference between down trend and uptrend oscillators is convenient to watch as a separate oscillator, which we named Chaos Barometer Excess. You can use this additional oscillator together with Chaos Barometer Trend or standalone, depending on your preferences. Both oscillators are based on the same methodology and calculation method. Selecting one or another is a matter of taste. Chaos Barometer Excess is just an additional aggregation of data from Chaos Barometer Trend. Be careful selecting equal Period setting for both oscillators to ensure their synchronicity. Quant Trade Technologies, Inc. June 9, /14

8 Below Chaos Barometer Excess is plotted alongside with Chaos Barometer Trend for a visual comparison. Chaos Barometer Excess is greater than zero, it indicates an uptrend. Values less than zero suggest a down trend. The bigger the deviation is, the stronger the trend evidence is. To facilitate this visual interpretation the indicator is accompanied with a zero line. Quant Trade Technologies, Inc. June 9, /14

9 Additional parameter Threshold plots constant level lines depicting a trigger condition. When Chaos Barometer Excess exceeds trigger level, trade signal emits. The level can be selected and optimized per time frame and security using strategy backtesting and optimization. Quant Trade Technologies, Inc. June 9, /14

10 4 Trading Strategy The Chaos Barometer package includes a ready trading strategy based on the above principles. Look when the barometer is in a green zone you would enter a long position preparing for an uptrend. When it finds itself in a red zone, an exit signal is cast and optionally you could enter a short position expecting a down trend to occur. We have tested a hypothetical historical performance of such a strategy and as you see received positive results as depicted below. Results will vary from market to market and largely depend on the size of the sliding window used in chaos estimations. It is worth exploring optimization of the strategy on various periodicities and windows sizes. In our backtests the optimized strategy shows profit factors above 2 on most of the markets and time frames we have tested. Additional extensions of the strategy may include a delay in entering the trade to ensure that the trend stays stable for one or more bars. This would be at the user s discretion. In combination the precise value of the one side Quant Trade Technologies, Inc. June 9, /14

11 trend above the opposite trend can also be used. Of course, the absolute value of the barometer in itself can serve as an additional filtering factor, again at the user s discretion. This should offer even greater performance outcomes. In real trading this simple strategic approach should be complemented with proper money management techniques for stop loss and profit taking conditions. This should offer even better performance outcomes. Quant Trade Technologies, Inc. June 9, /14

12 5 Chaos Barometer of the Market Equilibrium In physics, any thermodynamic system evolves to approach a state with maximum chaos. Markets are not different in this respect. Stable trends characterized with decreased chaos rarely last long. Normally, they quickly dissipate into undetermined high volatility conditions due to combined actions of market participants. Chaos Barometer reveals these market dynamics while providing an original alternative estimate for a flat and trendy market. These estimates principally differ from all standard estimates known in technical analysis because they rely on completely different principles of calculation borrowed from chaos theory and fractal geometry. Quant Trade Technologies, Inc. June 9, /14

13 Chaos Barometer selectively measures chaos inherent to momentous price oscillations within a given sliding window of measurement. CB separately attributes a measure of chaos associated with up and down trend movements in relationship to the price. It further watches the balance between prevailing chaos in either an up or down trending state. In conclusion this package is a perfect complement for fundamental and technical traders alike that analyze a number of markets and strategies while wishing to improve their entry and exit positions. Quant Trade Technologies, Inc. June 9, /14

14 Legal notice The product names used in this document are for identification purposes only. All trademarks and registered trademarks are the property of their respective owners. The following trademarks may or may not be marked in this document: Quant Trader is a trademark or registered trademark of Quant Trade Technologies, Inc. in the United States and/or other countries. Other company, product, and service names may be trademarks, registered trademarks, or service marks of other owners. Quant Trade Technologies, Inc. June 9, /14