## Tuesday, March 10, 2009

### Calculating the Power Measure

My previous post illustrated an indicator that I've called the Power Measure. It is a running correlation of price change and volatility. Several readers have expressed interest in calculating such a measure, so I thought I'd offer a basic explanation. I will assume a moderate familiarity with Excel.

Let's use five-minute open-high-low-close data. Column A in Excel will be Date; Column B is Time; and Columns C, D, E, and F are Open, High, Low, and Close for the ES futures. In my example, I downloaded the data from e-Signal into Excel and arranged the columns as above.

For Column G, we'll compute Price Change for the five-minute bar. I calculate that as a percentage change. The formula in Excel (cell G3) would look like:

=((f3-f2)/f2)*100

For Column H, we'll compute the Range for the five-minute bar, which will be our proxy for price volatility. The formula in Excel (cell H3) would look like:

=((d3-e3)/e3)*100

Now we copy G3 and H3 and fill in all the G and H cells to the end of the data sample (which, in my post, was one trading day). That will give us Price Change and Range for each five-minute period during the day.

Now, in Column I, we calculate the 20-bar correlation between the values of Columns G and H; that correlation is our Power Measure. So the formula for cell I22 would look like:

=correl(G3:G22,H3:H22)

Once again, we copy that cell (I22) and fill in all the I cells to the end of the data sample. We now have a moving 20-period correlation of five-minute data. It's like a moving average, except that it's a moving correlation. My chart simply plotted this moving correlation alongside ES price to illustrate how the indicator moved through the day.

I hope this explanation is helpful. For those with an interest, my new book goes into greater detail into the use of Excel to calculate market indicators and research historical patterns; that is the topic of Chapter 10.
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Bill M. said...

Dr. Steenbarger,

Have you studied the QQQQ:SPY ratio? This ratio compared to the performance of QQQQ is quite skewed lately. I'm searching for some reasons. Either things are "different" this time or we are in for down side moves in the Q's beyond what anyone may expect. Though we have made lower lows in the Nasdaq Composite (and other markets), we have yet to make lower lows in the Q's / ndx100.

Thanks,

Bill

twostep said...

Where do you get your data? I'm assuming you purchase a data feed from some where.

CoG said...

Will your new book be in Audiobook format so I can download via Audible.com to my Zune?

Brett Steenbarger, Ph.D. said...

Hi Bill,

Yes, I've seen divergences between those averages, but have not studied them. It's worth looking into, though; thanks--

Brett

Brett Steenbarger, Ph.D. said...

Hi TwoStep,

Yes, as noted in the post, the data come from e-Signal, which is subscription based.

Brett

Brett Steenbarger, Ph.D. said...

Hi CoG,

Thanks for the interest. There is a Kindle version and a PDF version of e-books for my new book, but no audiobook is planned to my knowledge.

Brett

Bill M. said...

It's a pretty straight forward study with peaks in the ratio serving as "danger" signs. However, right now, the ratio has made a higher high and the Q's have made a relative double bottom. I would be very interested in your comments. Thanks for some good books.

etoke said...

A truly great post, as always.

I would like to take this opportunity to put forward a newbie question. My greatest frustration in trading is translating such information into definate signals. I have coded this Power Measure into my charts and looked at various days. At the end of days like today, the sustained positive move is evident, as are the cumulative and average tick and other indicators, however rewinding, for example, back to the first hour, it looks no different to me, to other days where the Power Measure has risen, and immediately fallen together with a drop in the market. I have tried testing various ideas based on this and other indicators and have not been able to conclude anything - rises, falls, above zero, below zero... Surely no one indicator will a good trader make, but should I not be able to at least see something at some point which will aid my decision making, before the trading day is over?

Thanks for any feedback!

Brett ~

A very useful and convenient tool, with the added plus of simplicity ~ a prime virtue.

One could use this tool pretty much as is at different time resolutions, let's say day, week, to hunt for trendiness.

A lot of us are looking forward to your new book, which no doubt has hundreds of gems in it.

A ranking of around 1000 on Amazon prior to publication date is a fantastic accomplishment.

Congratulation!

Thanks for sharing so much with us.

Donn Carroll said...

I see you can get your books in PDF format where?