Wednesday, 5 May 2010

Monte Carlo Optimisation of Control Limits #5

Writing the function was a relatively simple matter of reusing some of the code that had already been written to perform the tests detailed so far. A graphical plot of the appearance of the indicator is shown above.

To reiterate so far, the indicator:
  • is designed to show when prices are moving sideways or moving in a sideways channel by containing prices between a support and a resistance zone
  • prices have been modelled as a sine wave to represent this sideways price action
  • the upper and lower boundaries of each zone are based upon the application of a control chart directly to prices
  • Monte Carlo techniques and statistical tests have been employed to optimise the boundaries of each zone such that approximately 95% of the time the peaks and troughs of the sine wave should occur within their respective zone boundaries
The next step will be to write a Monte Carlo routine to test whether this indicator performs as expected on a new "out of sample" set of randomised sine waves, and this will be the subject of the next post.

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