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.) ...

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