# 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 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