1 Topic by pradeepgolfer (edited by Popov 2016-02-29 17:40:17)

  • Registered: 2016-02-14
  • Posts: 160

Topic: Multicollinearity

Multicollinearity is a statistical term for a problem that is common in technical analysis. That is, when one unknowingly uses the same type of information more than once. Analysts need to be careful and not utilize technical indicators that reveal the same type of information.

Here is how John Bollinger states it: “A cardinal rule for the successful use of technical analysis requires avoiding multicollinearity amid indicators. Multicollinearity is simply the multiple counting of the same information. The use of four different indicators all derived from the same series of closing prices to confirm each other is a perfect example.”

The issue of multicollinearity is a serious issue in technical analysis when your money is at stake. It is a problem because collinear variables contribute redundant information and can cause other variables to appear to be less important than they really are. One of the real problems is that sometimes multicollinearity is difficult to spot.

http://d.stockcharts.com/school/data/media/chart_school/trading_strategies/multicollinearity002_000.jpg

Read more at http://stockcharts.com/ :

Multicollinearity

  • Popov
  • Popov
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  • From: Bulgaria
  • Registered: 2006-11-30
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Re: Multicollinearity

Pradeep,
I'm happy to see you link a this article because it seams I fell to explain to our auditory that using multiple indicator is only waist of computer power / electricity and leads to a global warming. No other effects especially for a trading strategy reliability.

That was the reason my first program use to have max 4 indicators and the Generator used max 2. Now the program comes with 8 entry indicators by default. Which are a way more than necessary.

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  • Registered: 2010-11-18
  • Posts: 1,179

Re: Multicollinearity

Yes, I totally agree about the redundancy of multicollinearity.

Another example where we can see the redundancy of multicollinearity is in the 1 min time frame scenario.

Many users (when they think about using 1 min time chart) have this mentality that if they use MA 10 for H4 time chart, they need to convert it, by multiply the amount of minutes etc to convert it in order to use it 1 min time chart.

So they think that in order to make use of LTF (multi time frame, strategy), eg. track MA 10 on H4 and convert it to M30, M15, M5 and M1

solution: 240/30=8  10x8=80  -------> MA 80 on M30 tracks H4 bar
             240/15 = 16, 10x16 = 160 ----MA 160 on M15 track H4 bar
             240/5 = 48....M5 track H4 etc the list of conversion goes on....

So they often ask the question, the number is too big by the time it reached 1 min time chart (for conversion), what to do?  And they felt lost and didn't know how to transfer their H4 time chart indicators into 1 min time chart.

The whole idea of LTF features, is to spare you from doing all these mental/mathematical calculation.  If you want to track H4, then choose H4 in the LTF feature, if you want track M30, then choose M30 in the LTF feature...all these tracking via 1 min time chart.

If you are using 1 min time chart as your platform, then you want to track H4, just input MA 10 and use LTF, H4 (instead of default).  That's it...no more conversion need to be done.  And please don't repeat the same values in all the rest of the time frame by adding more opening conditions for MA 80 for M30 and MA160 for M15. etc.  These values are all the same, tracking MA 10 for H4...another example of redundancy.

That's why in my trading tips, I only employ 1 particular set of indicator, MA.  If you know how to use other parameters (of MA) to measure different time periods, not the same MA10 in H4 but other time periods to ensure that both the "short term" and "long term" price trend are in the same direction to increase your predictability of the trend correctly.  Then your additional conditions are not redundant but necessary to reduce the "margin of error".

  • Registered: 2016-02-14
  • Posts: 160

Re: Multicollinearity

Popov wrote:

Pradeep,
I'm happy to see you link a this article because it seams I fell to explain to our auditory that using multiple indicator is only waist of computer power / electricity and leads to a global warming. No other effects especially for a trading strategy reliability.

That was the reason my first program use to have max 4 indicators and the Generator used max 2. Now the program comes with 8 entry indicators by default. Which are a way more than necessary.

thanks for improving my post by editing it.

you have my permission to improve all my posts