2016-03-31 6:28 GMT-03:00 meanomalist@yahoo.com [amibroker] <amibroker@yahoogroups.com>:
What do you think about just using a chart with Relative scaling?
I believe that is necessary, and yes, RSI would be still a good choice.
But in any case (relative scaling or not), I would:
1. Determine if historically the symbol is correlated to the index and how:
Alpha correlation - index goes up, symbol goesBeta correlation - index goes up, symbol goes down
2. Determine the confidence level or standard deviation of the correlation:
Example: If it is an Alpha, the symbol usually follows the index at 90% of its variation, 80% of the time.
So, if the index went up 2% in the last 3 days, the symbol should have gone up 1.8%
3. If the symbol is in his normal correlation range and the RSI of the symbol and index are not equivalent, it would be an opportunity to trade the symbol.
4. But, if the symbol is out of its correlation range it could be a bigger anomaly:
Something new is going on and it could be:
a. a even better opportunity to trade because the symbol would have a bigger correction;b. the symbol is loosing its historical correlation for some reason and should be evaluated again.
Those would be steps I would follow.
Problem is, it is not easy to determine the symbol:index correlation and these "confidence" ranges. It changes over time and even monthly on a year period.
Each symbol (company) has its own particularities. At least the time they pay the dividends vary.
It is a complex study.
But right or wrong, it is done all the time, like in Long&Short operations between only two symbols.
What I mean is, first of all that is necessary to determine the usual correlation.
After that, decide when to trade and in what conditions.
AB has the correlation() function.
I remember that Ed Pottasch was playing with some correlation codes.
If he has some codes published over the net, you can bet they are good.
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Posted by: =?UTF-8?Q?Jo=C3=A3o_Fl=C3=A1vio_Machado_Derzi?= <joaoderzi@gmail.com>
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