Saturday, April 16, 2016

Creativity, Innovation, Research and Development: Building Your Trading Future

Here are a few things I'm currently working on:

*  I'm looking at the Ichimoku Cloud indicator and whether it has any unique value in predicting future price behavior in stocks.  The challenge is in finding unique value, as any indicator is likely correlated with others and with past price change itself.  So inevitably you're looking at the value of the residuals (the indicator minus the overlapping input of other variables), not the relationship of the indicator to market behavior per se.  I've gathered the data for number of all stocks on NYSE each day that are moving into and outside their clouds and found some interesting things.  For instance, if very few shares move into their clouds from levels above and below, returns are much more bullish than if many shares enter their clouds.  Returns are also different when you look at the number of stocks trading above versus below their clouds.  The whole exercise has become a way of thinking about momentum and value factors in near-term returns.

*  I've divided each day's market into thin slices of volume and applied an algorithm to each slice to determine whether the volume transacted over that period was dominated by buyers or sellers.  This is different from looking at upticks versus downticks in the market, as it's designed to track the footprints of sophisticated execution algorithms that seek to buy the bid price and sell the offer.  The money flow figures resulting from this analysis show interesting divergences at turning points in the market.  (Right now it's lagging the recent market strength).

*  I've gone back to 1980 and am manually creating an event time-based time series of price behavior for SPX.  That is difficult, because you can't use volume bars (volume totals are wildly different over that period), so bars have to be created on the basis of price behavior.  Preliminary results suggest that market cycles are much more evident in the stock index when looking over long periods and when looking at bars that are activity-based and not based on chronological time.  The goal is to devise an active investment approach based on these cycles.

Well, you get the idea.  These projects may or may not pan out, but there will always be at least a couple of projects in my hopper at any given period.  Research and development never stops; that ensures that I keep learning and adapting.  

What does your R&D program look like?  How are you exercising creativity?  How are you innovating in your trading practice?  How are you going to be different and better by the end of this year?  These are the kinds of questions true trading entrepreneurs need to be addressing.

Further Reading:  Finding Your Creativity Zone