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Estimation of the Hurst Exponent - Trading Indicator

by Brian Brown, 3279 days ago
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Based on the Chaos Theory, the Fractal Market Hypothesis is an alternative to the Efficient Market Hypothesis. It assumes that each trader may interpret trading information in different ways and at different times (The Efficient Market Hypothesis assumes that all information is reflected in prices), that investors are not rational and influenced, in their trading decisions, by what has happened in the past and also by their recent experiences. It also assumes that price changes are not normally distributed (The best example is that usually prices fall much faster than they rise).

The Hurst exponent, also called "H" or "the index of dependence", is part of the Chaos Theory. It is a measure of the predictability of a time series. A value of H=0.5 means that the market or security follows a true random walk (The stock or market is unpredictable), while a value between 0 and 0.5 indicates that there is a negative autocorrelation (A decrease in the stock or market is likely to be followed by an increase), and a value between 0.5 and 1 indicates that there is a positive autocorrelation (An increase in the stock or market is likely to be followed by an another increase). The more the Hurst exponent is far from the 0.5 level, the more likely the underlying time-series is predictable.

This trading indicator (Hurst) returns an estimation of the Hurst exponent. It uses a range-estimation method in 63 different-sized regions. In order for the Hurst exponent to be calculated, your security or stock must have more than one year worth of daily quotes.


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Type: Trading Indicator

Object ID: 827


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Trading financial instruments, including foreign exchange on margin, carries a high level of risk and is not suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in financial instruments or foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.