Hey there! I've been diving into the book "Paul Wilmott on Quantitative Finance," and I stumbled upon this cool model for calculating and modeling returns. Basically, it helps us figure out how much a price has changed over a set number of periods—I like to use 20 periods as a default. Once we get that rate of change value, we crunch some numbers to find the standard deviation and mean using all the historical data we have. That's the foundation of this model.
Now, let's talk about how to use it. This model shows us how returns and price behavior are connected. When returns hang out in the +1 to +2 standard deviation range, it usually means returns are about to drop, and vice versa. Often, this leads to corresponding price moves. But here's the thing: sometimes prices don't do what we expect. Why? It's because there's another hidden factor at play—I like to call it "power."
This "power" isn't something we can see directly, but it's there. Basically, when returns are within that standard deviation range, the market faces resistance when trying to move in its preferred direction, whether bullish or bearish. The strength of this "power" determines if the market will snap back to the average or go for a wild ride. It can show up as small price wiggles, big price jumps, or lightning-fast moves. By understanding this "power," we can get a better handle on what the market might do next and avoid getting blindsided. In the meantime, I couldn't explain "power" yet, but In the future, when I've learned enough, I'd love to share the model with you guys!
So... I'm planning to explore and share more models from this book as I learn, even if those pesky math formulas can be tough to crack. I hope you find this indicator as helpful as I do, and if you've got any suggestions or feedback, please feel free to share! Ciao!
Now, let's talk about how to use it. This model shows us how returns and price behavior are connected. When returns hang out in the +1 to +2 standard deviation range, it usually means returns are about to drop, and vice versa. Often, this leads to corresponding price moves. But here's the thing: sometimes prices don't do what we expect. Why? It's because there's another hidden factor at play—I like to call it "power."
This "power" isn't something we can see directly, but it's there. Basically, when returns are within that standard deviation range, the market faces resistance when trying to move in its preferred direction, whether bullish or bearish. The strength of this "power" determines if the market will snap back to the average or go for a wild ride. It can show up as small price wiggles, big price jumps, or lightning-fast moves. By understanding this "power," we can get a better handle on what the market might do next and avoid getting blindsided. In the meantime, I couldn't explain "power" yet, but In the future, when I've learned enough, I'd love to share the model with you guys!
So... I'm planning to explore and share more models from this book as I learn, even if those pesky math formulas can be tough to crack. I hope you find this indicator as helpful as I do, and if you've got any suggestions or feedback, please feel free to share! Ciao!
Release Notes:
Optional Input:
- Log price
- Array Period
- Log price
- Array Period
Release Notes:
I added MA for better directional view towards the returns, it indicates whether the momentum is still going or not. So even if the returns exceed the deviations, it doesn't mean that it would go for a reversal, as it's still above/below the MA. It's safe to say when the market is below/above the MA... after the big momentum exceeds the deviation and declines slowly, you could trade for a reversal. Well that's all, goodluck with your trades! Ciao.