thequantscience

Autocorrelation - The Quant Science

Autocorrelation - The Quant Science it is an indicator developed to quickly calculate the autocorrelation of a historical series. The objective of this indicator is to plot the autocorrelation values and highlight market moments where the value is positive and exceeds the attention threshold.

This indicator can be used for manual analysis when a trader needs to search for new price patterns within the historical series or to create complex formulas in estimating future prices.

What is autocorrelation?
Autocorrelation in trading is a statistical measure used to determine the presence of a relationship or pattern of dependence between values in a financial time series over time. It represents the correlation of past values in a series with its future values. In other words, autocorrelation in trading aims to identify if there are systematic relationships between the past prices or returns of a security or market and its future prices or returns. This analysis can be helpful in identifying patterns or trends that can be leveraged for informed trading decisions. The presence of autocorrelation may suggest that market prices or returns follow a certain pattern or trend over time.

Limitations of the model
It is important to note that autocorrelation does not necessarily imply a causal relationship between past and future values. Other variables or market factors may influence the dynamics of prices or returns, and therefore autocorrelation could be merely a random coincidence. Therefore, it is essential to carefully evaluate the results of autocorrelation analysis along with other information and trading strategies to make informed decisions.

How to use
The usage is very simple, you just need to add it to the current chart to activate the indicator.
From the user interface, you can manage two important features:

1. Lenght: the delay period applied to the historical series during the autocorrelation calculation can be managed from the user interface. By default, it is set to 20, which means that the autocorrelation ratio within the historical series is calculated with a delay of 20 bars.

2. Threshold: the threshold value that the autocorrelation level must meet can be managed from the user interface. By default, it is set to 0.50, which means that the autocorrelation value must be higher than this threshold to be considered valid and displayed on the chart.

3. Bar color: the color used to display the autocorrelation data and highlight the bars when autocorrelation is valid can be managed from the user interface.

To set up the chart
We recommend disabling the 'wick' and 'border' of the candlesticks from the chart settings for a high-quality user experience.

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