Friday, 15 June 2012

candlesticks redux

Whilst the traces are progressing, I have focused on the processing of Candlesticks.

With an eye on what is assuredly a method that has gone through a lot of development over many years, I have re-engineered and carried out a data analysis on Candlesticks. There appears to be 3 aspects that are relevant:

1. Relational
This is the relationship between periods and states things like 'high today is higher than the high yesterday'

2. Elemental
This is within the period and states things like 'the close is very close to the high and the (close - open) is 0.005 of (high - low) 

3. Trend
Allocating trends on top of the previous 1 and 2, ie saying things like 'on a bullish trend and if todays high is greater than yesterday's high'

If we take all possible combinations of the above we get approximately 43 factorial different combinations of possible formulae. This is 6 to the power 52 - and wrong. It is wrong because we end up with statements like 'if todays high is less than todays low' - so we need to eliminate all combinations that do not make sense. This exercise for the Relational section gives us 22 different options, Elemental is 3, and Trend is 2.

The permutations here now (rather than combinations as per the traces), gives 22 x 22 x 4 x 3 different correct permutations: 5,808 - the 4 and the 3 are one plus Elemental and Trend - and compared to the 300,000 odd combinations being currently calculated for each company via the traces.

Also needing to be taken into consideration is if the close for a period (within each period) is higher or lower than the period's open - there being 4 options - the options of current and previous period close and open - but still 5,808 options per combination.

What these 5,808 permutations give us is every single possible combination of states between 3 periods and prices of open, close, high and low.

And so the Candlestick trace engine is taking shape. When completed and run we will have success indicators for every single type of Candlestick combination for every company. We can then match these Candlestick traces to current period indicators, giving us the same type of information as the traces.

What I am expecting to see is that the combinations with the best success coefficients will have been named. I have done this re-engineering because the first pass at Candlestick analysis has given some random results and I need to know that I have covered all bases, in this case all possible permutations - it also makes certain that I havent missed anything.

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