The Gateway to Algorithmic and Automated Trading

This Issue's Round-up of AT's Proprietary Alphability Metrics

Published in Automated Trader Magazine Issue 08 Q1 2008

Trend and Reversal Alphability data for stock index and bond futures and top/bottom five Dow stocks.

alphability

Alphability is Automated Trader's proprietary tradability metrics. These environmental statistics are intended to assist those building trading models/systems in determining which markets and time frames are most favourably responsive to which generic types of model. They are not a set of trading models, nor are they any sort of judgement as to whether a particularly market is 'good' or 'bad'.

Trend Alphability

The Alphability stats for determining the 'trend friendliness' of markets shown here are based upon determining the amount of noise around a hypothetical trend. The simplest variant of Trend Alphability depicted here consists of the R2 (coefficient of determination) of a linear regression line plotted through the data points between the bars on which the low and high of a trading session were made (or the reverse if the high was made first). The calculation is based on the mid point of price bars in a variety of time frames. Multiplying this daily Alphability metric by the high/low range for the day (expressed as a percentage change) gives a ratio of 'trendiness' to the maximum available reward.

Reversal Alphability

Reversal Alphability follows similar general principles to Trend Alphability in that it provides a metric for the ease or difficulty of capturing a hypothetically optimal alpha. As the name implies, the differences lie in the generic types of model used. The variant of Reversal Alphability shown here is based upon two very simple reversal patterns, the short entry version of which is illustrated in Figure 1. For a short position the reversal entry logic is a bar (Bar 3) with a mid value greater than the preceding and succeeding bars (vice versa for a long entry). To calculate the metric, the number of reversals in a
day are calculated and divided into the sum of the percentage change of the moves from each reversal
to the next.

(Trend and Reversal Alphability are not necessarily mutually exclusive; it is perfectly possible for an instrument to have simultaneous high/low scores
for both.)

Score significance

Trend Alphability:
Stocks and stock index futures - above 2 extremely benign, 1-2 acceptable, below 1 (and especially below 0.5) adverse. Commensurate categories for bond futures are typically a third of these values.

Reversal Alphability:
Stocks and stock index futures - above 0.4 extremely benign, 0.3-0.4 acceptable, below 0.3 (and especially 0.2) adverse. Commensurate categories for bond futures are typically a third of these values.

For more information on Alphability, please see page 56 of the Q3 2007 edition of Automated Trader or visit http://www.automatedtrader.net/Alphability.xhtm

Figure 2: Daily Trend Alphability - Top Five Dow Stocks
Figure 2: Daily Trend Alphability - Top Five Dow Stocks


Figure 3: Daily Trend Alphability - Bottom Five Dow Stocks
Figure 3: Daily Trend Alphability - Bottom Five Dow Stocks


Figure 4: Daily Trend Alphability - Stock Index Futures
Figure 4: Daily Trend Alphability - Stock Index Futures


Figure 5: Daily Trend Alphability - Bond Futures
Figure 5: Daily Trend Alphability - Bond Futures


Figure 6: Daily Reversal Alphability - Top Five Dow Stocks
Figure 6: Daily Reversal Alphability - Top Five Dow Stocks


Figure 8: Daily Reversal Alphability - Stock Index Futures
Figure 7: Daily Reversal Alphability - Bottom Five Dow Stocks


Figure 7: Daily Reversal Alphability - Bottom Five Dow Stocks
Figure 8: Daily Reversal Alphability - Stock Index Futures


Figure 9: Daily Reversal Alphability - Bond Futures
Figure 9: Daily Reversal Alphability - Bond Futures