Structural breaks and non-stationarities are prevalent features of markets. The questions which occur most often when considering them is how to distinguish regimes and whether they can give rise to trading opportunities?
Apart education, this post is to draw your attention to the CSSA-Coupling Index. This indicator in the CSSA package uses the variance in price accounted by two individual cycles in a sliding window to return a degree of coupling between them.
In the example below, we show the CSSA-Coupling Index applied to the Dow Jones Industrial Average EOD (DJI: ^DJI).
The top panel shows price. The bottom panel shows the index. We have marked the tops of the index that occurred above the 0.2 level with red vertical lines.
The regimes in price could arise in a number of ways:
- Change in trend,
- Change in volatility…
Note that the marks delineate some of these regimes quite well. They mostly show early signs that the trend is about to change; peaks might even develop before a local change occurs. This is very interesting not so much because peaks signal that something is amiss with the current trend but because changes in volatility tend to be persistent in between meaning that markets can be seen as a series of regimes each of which is homogeneous.
This should appeal to traders who can use these early signals to reconsider their trading strategy after confirmation that a structural is about to occur.
Chart Example: Dow Jones Industrial Average EOD (DJI: ^DJI):
Top panel: Price, OHLC
Bottom panel: CSSA-Coupling Index (Close)
m-histories = 40 bars
Component#1 = 5
Component#2 = 2
Window = 100 bars
Apart education, this post is to draw your attention to the CSSA-Coupling Index. This indicator in the CSSA package uses the variance in price accounted by two individual cycles in a sliding window to return a degree of coupling between them.
In the example below, we show the CSSA-Coupling Index applied to the Dow Jones Industrial Average EOD (DJI: ^DJI).
The top panel shows price. The bottom panel shows the index. We have marked the tops of the index that occurred above the 0.2 level with red vertical lines.
The regimes in price could arise in a number of ways:
- Change in trend,
- Change in volatility…
Note that the marks delineate some of these regimes quite well. They mostly show early signs that the trend is about to change; peaks might even develop before a local change occurs. This is very interesting not so much because peaks signal that something is amiss with the current trend but because changes in volatility tend to be persistent in between meaning that markets can be seen as a series of regimes each of which is homogeneous.
This should appeal to traders who can use these early signals to reconsider their trading strategy after confirmation that a structural is about to occur.
Chart Example: Dow Jones Industrial Average EOD (DJI: ^DJI):
Top panel: Price, OHLC
Bottom panel: CSSA-Coupling Index (Close)
m-histories = 40 bars
Component#1 = 5
Component#2 = 2
Window = 100 bars
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