ME: Quantifying the ‘trading’ and ‘trending’ distinction
Mr. Goodman’s Market Environment methodology (ME) precisely quantifies the well-known but vague market idea of ‘trading’ and ‘trending’ markets. It has four primary components: Directional Movement, Volatility, Price and Time Rhythm and Thickness. A matrix of Directional Movement, Volatility and Rhythm provides a ‘temperature’ for any and all markets. Hot, Cold, Warm or Cool markets each have unique characteristics which imply different ways to trade each of them correctly.
Market Environments has a rich spectrum of applications to trading – forecasting, money management, back-testing, performance analysis, trade diagnostics and portfolio allocation.
Mr. Archer has demonstrated that a short well-constructed system back-test using ME is more predictive of future performance than a longer real-time test.
Directional Movement (DM) measures the net change in prices from a specified point to another. Volatility (V) measures the aggregate change in prices between two points, given a minimum fluctuation value. A matrix of (DM, V) pairs from (1, 1) – very low/very low to (10, 10) – very high/very high defines any market with the precision required for programming.
Even a long real-time system test may be skewed and unbalanced with respect to the above ME cells. A back-test which provides a balanced ME data sample is more accurate in predicting the long term viability of a system or method.
Market Environments
ME: Quantifying the ‘trading’ and ‘trending’ distinction
Mr. Goodman’s Market Environment methodology (ME) precisely quantifies the well-known but vague market idea of ‘trading’ and ‘trending’ markets. It has four primary components: Directional Movement, Volatility, Price and Time Rhythm and Thickness. A matrix of Directional Movement, Volatility and Rhythm provides a ‘temperature’ for any and all markets. Hot, Cold, Warm or Cool markets each have unique characteristics which imply different ways to trade each of them correctly.
Market Environments has a rich spectrum of applications to trading – forecasting, money management, back-testing, performance analysis, trade diagnostics and portfolio allocation.
Mr. Archer has demonstrated that a short well-constructed system back-test using ME is more predictive of future performance than a longer real-time test.
Directional Movement (DM) measures the net change in prices from a specified point to another. Volatility (V) measures the aggregate change in prices between two points, given a minimum fluctuation value. A matrix of (DM, V) pairs from (1, 1) – very low/very low to (10, 10) – very high/very high defines any market with the precision required for programming.
Even a long real-time system test may be skewed and unbalanced with respect to the above ME cells. A back-test which provides a balanced ME data sample is more accurate in predicting the long term viability of a system or method.
Download ME: An Overview