I direct maintain consistently constitute that success comes from scream for meliorate as well as deeper questions. It’s the out of the box questions that tin post away Pb to fresh insights as well as answers. I of late came across a 2014 review of functioning from a trader that outlined all the mistakes he had made during the yr as well as the things he wanted to improve. I asked a query he did non anticipate: “What did y’all create good inwards 2014 as well as what if y’all *only* did those things inwards the novel year?” Asking a fresh query volition non e’er generate novel as well as meliorate answers, but scream for the same, stale questions virtually sure as shooting volition non yield creative insights.
In my electrical flow research, I’m looking at overbought as well as oversold indicators. How much of an border create they truly provide? Do roughly measures offering significantly greater edges than others? Over what fourth dimension frames? Do overbought as well as oversold measures offering dissimilar levels of border inwards dissimilar types of markets? Are at that topographic point times to use these indicators as well as times nosotros should non hold upward giving them weight?
Notice that such an approach is really dissimilar than only looking at a touchstone mensurate such every bit RSI or Stochastics as well as pronouncing a given grade every bit overbought or oversold. It’s the tougher, to a greater extent than detailed questions that tin post away yield nuggets of insight.
For example, suppose nosotros rails the set out of stocks inwards the SPX index that are making fresh five-day highs vs. five-day lows. If nosotros larn dorsum to 2006 as well as split the marketplace position into quartiles based upon volatility (VIX), nosotros detect that an oversold grade inwards the lowest VIX quartile (1 SD below average) is -62. An oversold grade inwards the adjacent VIX quartile is -138. In the tertiary VIX quartile, the same oversold grade is -199. And at the highest VIX quartile, the oversold grade is -265. In other words, what constitutes overbought as well as oversold is relative to the volatility government of the market. Looking at static levels of overbought as well as oversold across all markets gives us really distorted results.
Does a regime-specific mensurate of overbought vs oversold breadth offering a greater trading border than an absolute level? It’s all really testable, but alone if nosotros assemble the information as well as enquire the question.
Further Reading: Institutional Participation as well as Momentum