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'.
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
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
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.
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